Authored by William Robert Barber
My solution once the problem is diagnosed: When it became clear that the problem was a need for a guarantee of liquidity for the issued AIG ‘put derivatives’, the US government should have immediately formed a specially designated company (SDC), capitalized initially with treasury bonds to be utilized exclusively as the bona fide surety for any and all outstanding derivative obligations. The recipient or counter-party or purchaser of the AIG issued derivative could have now held the treasury bond as collateral earning interest, cashed the bond, or borrowed against the bond from the government.
This SDC should have been a globally-traded public entity offering preferred stock participation for institutions, licensed investment companies, and broker-dealers; in addition, common shares and bonds would be offered to the public at the standard floating bid-and-ask price.
I would order the SEC, in certain specifically designated cases, to permit financially troubled firms to be allowed to circumvent the subordinated debt rules and regulated procedure so to coordinate relieve from the SDC. This SDC entity would commit the same guarantees to those broker-dealers’ suffering from pending impairment because of insufficient subordinate debt ratios.
The collateral for these treasury guarantees would be all of the company’s assets, treasury stock; one or more members of the SDC would sit on the board and board of directors’ voting rights would be suspended until conversion to profitability was affirmed. As to the assets of broker-dealers, the SEC would hold same in a custodial account and for a fee provide transparent accounting and accountability until the broker-dealer is operationally viable.
The company’s senior management (which would include all companies that take SDC surety) would form individual management companies that would contract with the counter-party of the SDC (in other words their own former company) to provide managerial services for a specific fee over a specific period of time. The management company would retain the sole and exclusive rights to convert the management agreement to its original position after the company has returned to operational viability.
Because of the possession of this right to convert, the management company would have a special and significant inherent value; indeed, the management company would be motivated to succeed for a number of differing reasons.
Without hesitation, I would order a three-year reprieve or until the FASB board meets (whichever occurs sooner) to formally eliminate mark-to-market requirements as well as rescind FAS 157 in favor of FAS 133.
I would incentivize the individual participants of the common share purchasers including institutions with a moratorium on taxes for any dividend issued or gain sustained from their common share appreciation.
Well, there you have it: My solution to the so-called crisis…