Comments on: A New Goal For TARP Money: Create Mutual Banks

By: Charles

Charles — Wed, 14 Jan 2009 16:36:37 +0000

A refinement to make it a better idea, IMO, would be to further require a separation into “deposit taking” instiutions and “lending” institutions. There is no reason they have to be married together. Further the “deposit taking” institutions should effectively offer mutual funds (mainly money market) where all the investment risk is borne by the customers. These “deposit taking” institutions essentially compete based on expenses. The “lending” institutions would underwrite loans and package them up into funds (to be invested in by customer of the deposit taking institutions amongst others) but the “lending institutions” would be require to retain a significant first loss position on everything they underwrite (this being their capital requirement). Distinct and appropriate regulation would apply to each institution with a focus on “skin in the game” for the lending institutions and “disclosure of fund risk profile” for the “deposit taking” institutions. Governments could provide different safety nets to the two institutions. Ancilliary banking activities like derivatives would be moved to other types of financial institutions and regulated such that their potential insolvency does not jeopardize the lending and deposit taking institutions.

By: Daniel

Daniel — Mon, 12 Jan 2009 16:34:31 +0000

David, this is a very interesting proposal. I like the incentive message it sends, the way it helps to diffuse the big issues rather than setting us up for an even bigger disaster next time with “way too big to fail” institutions that the governments aren’t able to recapitalize, etc.

My one fear is that this would create an enormous initial shock to the system. The write-off of all bank investments would be an exogenous shock unlike any our economy has ever experienced. I understand your views from the past that institutions’ capital structures should be such that they can withstand shocks, but the black swan nature of what you’re proposing would likely rock every industry with any mildly fixed cost structure. Foreign banks would fail as well, forcing their governments’ hands into either similar or other unpredictable reactions. What would you recommend the transition to such an end-game look like?

Thanks, as always, for a very thought-provoking post.

By: Robert

Robert — Mon, 12 Jan 2009 15:10:34 +0000

I may be mistaken, but there are already 1,000’s of mutual S&L’s out there – one to three branch banks that were started with a slug of private capital, but are essentially owned by depositors. In fact Peter Lynch put the spotlight on these institutions in the early 1990’s, because depositors got a great deal when they demutualized.

There is another brand of mutual bank out there that is doing fine – credit unions.

By: rossgreenspan

rossgreenspan — Sun, 11 Jan 2009 05:10:33 +0000

What’s the minimum you need to start a bank? I mean, you or me. Or you and me? Barriers to entry in lending are practically zero, everything is based on trust.

Can I form a bank holding company in Delaware, and seek TARP funds with the explicit purpose of lending?

How about I solicit Grameen-style groups of 5 for microcredit loans? Consolidate your debt with your neighbors and in-laws.

By: Rudy Perpich

Rudy Perpich — Sat, 10 Jan 2009 20:59:32 +0000

Yes, definitely send the idea. I like it primarily because it would reduce fear among depositors. People are becoming more afraid each day as they learn of lost investments, endangered savings, job cuts and home foreclosures. We are a fear based nation right now, and fear diminishes our resilience.

Many thanks for the blog; you help a lot of people with your writing. Clear, honest information gives people hope and confidence.

Best wishes,

By: TS

TS — Sat, 10 Jan 2009 20:37:18 +0000

Brilliant…absolutely brilliant. This is the best banking idea I’ve heard during this mess. Send it to everyone. Since Paulson, the ultimate slave to Wall Street, is leaving it could actually have a chance. The big banks would fight hard to kill it, but this is a plan I would think Dems would love. I’m fiercely Libertarian and even I like the plan (since we’re going to have some sort of plan anyway…might as well be a sensible approach).

Nice work David.

By: Paul in Kansas City

Paul in Kansas City — Sat, 10 Jan 2009 18:42:40 +0000

This is a good idea; and I think you posted an idea of offering US citizenship to individuals/families that buy a home minimum $300,000 in cash. What the heck; give them tax breaks for 10 years; we just rebablanced global trade!! This idea would really work too.

By: matt_swansojeiker

matt_swansojeiker — Sat, 10 Jan 2009 14:52:17 +0000

Send it along, no question. Shedding the hideous concentration risk in the system would be a huge positive. I just grind my teeth when I hear of one of these “too-big-to-failers” using TARP funds to buy other banks. It should work the other way around.

And we’ll need something in place for the day when we finally recognize today’s behemoths are actually insolvent entities.

By: A.S.

A.S. — Sat, 10 Jan 2009 12:16:54 +0000

…..Should I send it on to the Obama Administration?…..

YES, ABSOLUTELY.