Monday, December 21, 2009

“The Zimmer Plan,” Redux; Not a Fannie/Freddie Bailout

Last week I touted a proposal from Rob Zimmer, a DC-based financial services political consultant.

Zimmer would mandate the Obama Treasury, via regulation, or Congress through legislation (the former being far easier, that Fannie Mae and Freddie Mac reduce-- to something lower than the current 10%--what they pay to the government for their TARP borrowings and direct the difference into dividends on previously issued preferred stock. That stock was gobbled up by many community banks, at the urging of then Treasury Secretary Hank Paulson,

But Paulson pulled the plug on the small banks, which he had cajoled into buying the capital qualify preferred stock, when he ended all dividends on GSE sceurities, after putting both Fannie and Freddie into federal conservatorship late in 2008.

Zimmer’s idea has little to do with resurrecting Fannie and Freddie, since the two companies would be paying out the same amount of money annually. He would share that $10 Billon between preferred stock owners and the US Treasury. It would be a huge capital benefit to the community banks which stand ready and willing to lend to small businesses and others.

Their big bank brethren, in contrast, continue to defy or slow walk the Obama team on Administration requests to the behemoth financial institutions to start lending again to small businesses where the potential for jobs generations seems greatest. (I am very surprised that the slogan loving GOP, so worried over small businesses hasn’t picked up this effort and championed it. It’s nearly cost free.)

The theory is that the small banks will lend to whomever the Treasury suggests, given that a few billion in dividends on their GSE preferred suddenly would allow them to generate $200-$350 Billion in fresh lending. That's lot of potential jobs being ignored if Obama officials refuse to act on the idea.

I hope the Administration's financial/economic/political wizards see the benefit in helping responsive smaller banks stimulate some fresh lending and rectify the tricky sleight of hand which the Paulson Treasury and Bush White House perpetrated against the community banks.

If Treasury doesn’t act, then Congress should.

Happy Winter and happy holidays to all and wishes for good health and much success in the coming year to you and yours.

(Happy birthday to Heidi Wynn Maloni, who turns 29 for the 31st time on December 23.)


Maloni, 12-21-2009

6 comments:

Anonymous said...

Hi Bill,

I always enjoy your posts, but I question how the administration could justify doing something that would benefit the hedge funds that have speculated on GSE preferred stock. Not sure how you help the small banks without providng a windfall to the hedgies.

Just a thought.

Jaret Seiberg

Bill Maloni said...

Jaret--Thanks for your accurate observation. You raise a legitimate point. But some/many banks still carry the stuff on their books.

The banks would achieve the biggest bump with new dividends acting as capital to leverage fresh lending.

But, you are correct, without public lists of who now owns the preferred (the issuing companies nor the SEC can divulge those names), it is tough figuring out the exact beneficiaries.

At the end of the day, I would take the risk--even if some crows get fed by feeding the cows--that the re-establishing the dividends will drive community bank small business lending which in turn acts as a jobs generator.

John said...

This is sometimes how great countries fail.

"Because we might help some hedgies in theory, we must continue to harm the entire US economy in general, and fail to right a wrong for the US job-generating small banks."

I only hope the US leadership is a little more strategic in their thinking.

BTW, did any hedgies make some money on the restored BofA, Goldman, Citi, etc.?

Or maybe we should all do nothing forevermore so no hedgies ever make a nickel again.

John said...

And with my advance apologies for the beginnings of an ungentlemanly rant--but with the current Washington excoriation of hedge short-sellers (who were merely exposing unartful frauds along the way) combined with the poster's sense that long-sellers ought not to be long anything--one sees the advent of a Putin-esque economy where only large government-supported entities are in favor.

The rest of the business world...must remain under suspicion apparently. And kneel at the feet of the big banks, and big-bank government fiat.

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