Missed opportunity for the FEE plan

By David Moon, Moon Capital Management
December 9, 2007

Almost seven years ago, stock prices started a multiyear decline that eventually saw the bellwether S&P 500 index decline 50 percent over 2 ' years. The largest stock in that index, Microsoft, was owned by millions of Americans, including a vast number of institutional investors and fund managers responsible for billions, if not trillions, of dollars. Microsoft declined 67 percent and still sits 45 percent below its December 1999 level.

But it didn't have to be that way. It seems that then Treasury Secretary Lawrence Summers missed a golden opportunity to implement a federal economic enabler plan, or FEE plan.

The purpose of the FEE plan would have been to prevent much of the economic malaise that resulted from the collapse of prices in 2000. Assume an unlucky investor bought a stock that subsequently declined in price. He had to buy the stock from a lucky investor who somehow managed to sell the stock at a high price.

Well, that's not very fair.

The FEE plan would have called for the federal government to somehow make the lucky investor give some money to the unlucky investor. The unlucky guy shouldn't have to lose his money simply because he bought his stock at the wrong time. That's not his fault.

Some investors were even doubly unlucky. They borrowed money to buy stocks that declined in price. The government should have renegotiated the terms of those loans so they wouldn't lose their collateral ' the stock that was declining in value.

If the lucky investors weren't willing to share their lucky gains with the unlucky folks, the state or local governments could have borrowed money to make up the difference.

Of course, the FEE plan might not seem quite fair to the folks who didn't own Microsoft in 1999. And there is the risk that the unlucky investors might be tempted to continue to disregard all reason and buy stocks like Microsoft at 80 times earnings. Why shouldn't they? Heads they win. Tails you lose.

Under the FEE plan, however, stock prices might never go down again. The government would simply ban corrections.

That is, until it ran out of borrowing capacity, or inflation became so rampant that investors actually welcomed a stock price correction.

Does the FEE plan sound silly and far-fetched? Absolutely. But that doesn't mean that it isn't real.

Just substitute real estate for stock prices.

At a housing conference on Monday, Treasury Secretary Henry Paulson said he was 'aggressively pursuing' an agreement that would let certain borrowers freeze the interest rates on their adjustable-rate mortgages. Generally these would be homeowners who can make their payments at the current teaser rates, but would not be able to afford the higher payments once the rates reset to market rates.

Paulson said that his plan 'does not, and will not, include spending taxpayer money on funding subsidies for industry participants or homeowners.'

Later in his speech, he said that state and local governments should be prepared to issue bonds to temporarily help some homeowners.

I suppose he forgot that taxpayers also pay state and local taxes, too.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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