October 1, 2008: Kaptur and DeFazio Propose the No BAILOUTS Act

"We want a good bill, not a fast bill. We want a bill that will really work," saidKaptur, the senior-most woman in the House.

A summary of the "No BAILOUTS Act" follows.

Watch the video of the press conference.


1) Require the Securities and Exchange Commission (SEC) to require an economicvalue standard to measure the capital of financial institutions.

This bill will require SEC to implement a rule to suspend theapplication of fair value accounting standards to financial institutions, whichmarks assets to the market value, no matter the conditions of the market. Whenno meaningful market exists, as is the current market for mortgage backedsecurities, this standard requires institutions to value assets at fire-saleprices. This creates a capital shortfall on paper. Using the economic valuestandard as bank examines have traditionally done will immediately correct thecapital shortfalls experienced by many institutions.

2) Require the Securities and Exchange Commission to restricting naked short sellspermanently

This bill will require SEC to implement a rule that blocks nakedselling, selling a stock short without first borrowing the shares or ensuringthe shares can be borrowed. Such practices many times harm the companiesrepresented in the sales and hurt their efforts to raise capital. There is noeconomic value produced by naked short sales, but significant negative effects.

3) Require the Securities and Exchange Commission to restore the up-tick rule permanently.

This bill will require SEC to implement a rule that blocks shortsales without an up-tick in the market. On September 19, 2008, the SECapproved a temporary pause of short selling in financial companies "to protectthe integrity and quality of the securities market and strengthen investorconfidence." This rule prevents market crashes brought on by irrational shortterm market behavior.

4) "Net Worth Certificate Program"

This bill will require FDIC to implement a net worth certificateprogram. The FDIC would determine banks with short-term capital needs and theability to financially recover in the foreseeable future. For thoseentities that qualify, the FDIC should purchase net worth certificates in theseinstitutions. In exchange, these institutions issue promissory notes torepay the FDIC, counting the amount "borrowed" as capital on their balancesheets. This exchange provides short term capital, with not cashoutlay. Interest rates on the certificates and the FDIC notes should beidentical so no subsidy is necessary.

Participating banks must be subject to strict oversight by the FDICincluding oversight of top executive compensation and if necessary the removalof poor management. Financial records and business plans should besubject to scrutiny while participating in the program.

In 1982, Congress approved a program, known as the Net WorthCertificate Program, that allowed banks and thrifts to apply for immediatecapital assistance. From 1982 to 1993, banks with total assets of $40billion participated in the program. The majority of these banks, 75%, requiredno further assistance beyond the certificate program.

5) Increase the FDIC Insurance limit from $100,000 to $250,000.

The bill will require the FDIC raise its limit to provide depositorsconfidence that their money is safe and help eliminate runs on banks which aredestabilizing to the industry.