"No BAILOUT" Act: A Sensible Bill

Representatives DeFazio, Edwards, and Kaptur have introduced the "No BAILOUT" Act as an alternative to the $700B Paulson/Bush Wall Street bailout plan which failed in the U.S. House. I am very happy with the No BAILOUT Act, especially the increase in FDIC insurance limits up to $250,000 which has essentially universal support and which would protect a lot more small businesses that are simply meeting payroll each month.

My only minor quibble with the bill is suspension of "mark to market" rules. Currently financial institutions must value their assets according to what they would fetch if sold now. Try to sell your house in the next 5 minutes. Would you get a lot less money than the house is worth? Of course you would. Most assets are, to some degree anyway, illiquid. But allow, say, 90 days to sell and that house price is much more reasonable.

The bill sponsors and I may be thinking of the same thing here, but there should be some reasonable valuation for these assets. And I think 90 days is about right. That is, assets should have a value equal to their liquidation value within the next 90 days. Said another way, "mark to market" should be "mark to the 90 day market." Now, establishing those values in non-functioning markets could still be difficult, but conceivably there could be a secondary market which helps establish these values. Also, there might be short-term "relief valves" that the SEC establishes. I think SEC should be allowed to declare "asset valuation freezes" if they observe that markets are not functioning. Such a freeze could be for 30 days, roughly similar to the short-term short selling suspension that the SEC declared recently. However, any such freezes should be as narrowly tailored as possible (by geographic area, market segment, corporate entity, etc.)

All that said, the No BAILOUT Act is an outstanding piece of legislation at this moment in time, and I urge both Democrats and Republicans to support it. If the Paulson plan, or anything remotely like it, comes back up for a vote, all Congressmen should kill it again.

As an aside, while I overwhelmingly support Barack Obama, shame on him for surrounding himself nearly exclusively with Wall Street executives and others who deserve ample blame for the current mess. As one example, Dr. Laura Tyson is an Obama advisor on the economy and financial markets who also sits on the Morgan Stanley Board of Directors. Conflict of interest? You bet, and it's outrageous, especially considering Obama's otherwise decent stance against lobbyist influence.