Does Insurance make sense?

Life insurance: an example
First of all if you were going to underwrite life insurance you would make sure that the insured client was alive first. Wouldn't you?

The GOP Plan
We have very little to go on in this GOP plan. But it doesn't seem to add up. You can't insure losses from here on out unless you know where prices are. If you take mark-to-market prices you already know that the level is too low for banks to survive. No one knows where these hold-to-maturity prices are that the Fed is trying to discover through reverse auctions, so you can't make that price the baseline for insurance. If they are talking about insuring at par this is a bigger give-away than Paulson's plan.

It's all about MONEY
Talk is of having banks pay premia for an insurance fund based on mortgage holdings but its too late to generate enough money to cover what's out there in losses. You can't write life insurance in the middle of funeral. Moreover, private insurance already has failed, and no one has come up with enough money to even buy out WaMu ( JPMorganChase took them after bankruptcy) let alone other troubled carriers. How are we to get enough private sector money to do this? It is not realistic. Any insurance solution will take just as much public money as Paulson' plans since it must get banks on even footing.

IDEOLOGY!
GOP members clearly have ideological problems with a bail out and with the use of public monies as a solution. They are are seeking solutions consistent with their beliefs. There's no harm in that. But at some point reality will rear its ugly head.

PAULSON PLAN WAS JUST TOO UNREALISTIC
...turn the other cheek, no, not that one, the one where your wallet pocket is...
Another reason for GOP disgust is that the Paulson plan originally called for public money to buy complex securities at higher than market prices with no strings attached at all. This was justified by the argument that buy-to-hold will produce a higher price and using some untried technique to get at that price. At the same time that rocket-scientists' pricing models (think CDOS and credit derivatives) have failed, it is not unreasonable to have skepticism that this plan is founded on a thin reed of academic hope.(hype?)

Was Bernanke really lured by the dark side Obi-wan?
The academic demand was for a wide a participation as possible prompting Bernanke to side with the no-strings part of the deal even though THAT by itself imbued the program with moral hazard the likes of which has never before been seen. The Chairman has said nothing about moral hazard since this plan was mooted.

I do not know what I do not know: inspector Jacques Clouseau pricing
Is it cost effective? It will be hard ever to tell if Treasury paid too much for these securities and it is not clear that buying $700bln will jump start bank lending or attract new capital to these banks that are former sink holes for losses.

Be careful about introducing disincentives
Some want to cut or ban dividends as the price of help. I would not do that. Better to take a capital stake in the firm and retain some control over dividend payouts rather than a ban. You do want these firms to be able to attract capital after the bail out. Stopping dividend payments will scare investors away. Take your pound of flesh from current shareholders only in the form of a capital stake and whatever share of dividends that might imply as they are paid out.

An even better mousetrap! FREE! taxpayer free!
Indeed the better plan is not to commit ANY public money but let banks themselves use hold-to-maturity pricing instead of mark-to-market pricing. Let each bank directly absorb that change in accounting rules and make the switch in accounting regimes, a switch that subjects the bank to some capital ownership by the Feds, CEO pay oversight etc. Keep them tracking mark-to-market prices. Bank examiners would have to use oversight to keep banks from using prices that are out of touch with reality.

It's always something...
One problem with this plan is that there is No mechanism to discover buy-and hold value universally. Each bank will make up their own valuation, but subject to oversight. Over time and as the economy improves we can expect differences in valuation to diminish.

Like the Paulson plan in impact
At least THIS plan costs no tax payer dollars. Banks that had written down CDOs the most aggressively will get he most benefit, but that is the same under the Paulson plan.

What's worth $trln in front money?
I'd rather let banks guess at value and oversee them for it than to spend $1 trn for experimentation with auctions.

If the GOP guys are having a problem with all this. Its hard to blame them.

POLITICS POLY-TICKS POL-ICK!
The insertion of McCain and Obama into the mix has not been helpful. Democrats are blaming McCain for the set back to their deal. As outsiders we can't really know. McCain made a big deal about returning to Washington to participate so he should not be surprised when Democrats go after him for doing so to take back whatever push he got for seeming to put the country first. And so it goes.

Some truths
The timing with elections couldn't be worse.

The timing of the economy weakening couldn't be worse.

The do or die 'one plan or none' approach was another big mistake since no one likes to get railroaded.

Paulson and Bernanke come out this as damaged goods with both looking naive. Paulson looks like he was in a grab for funds for his buddies on Wall Street and Bernanke looks a bit like he was out maneuvered into being a perhaps unwitting accomplice.