I am merely a headhunter, but I believe I have solved the financial crisis

Wouldn't it be great if...

- The national debt was repaid

- The interest and capital repayments on the national debt were now spent on lowering taxes and raising public spending instead

- The private sector expanded and employed more people

- The unemployment numbers were reduced and so was the social security bill

- The public finances were in balance

- The banks did what the public consider to be a fair share of fixing the economy and the banks even got a PR win for doing so.

And all this happened in say, about 18 months. Yes, that would indeed be great.

Well, here's an idea. Raise the minimum valuation for a CDO portfolio to above zero.

That's it really.

What do you mean you don't get it? Oh, you want me to show the working out. OK, here it is:

CDO portfolios are hard to value. I mean, like, really hard. Just in case they turn out to be as toxic as everyone thought they were, banks are obliged under capital adequacy regulations to stash a load of money aside. All sensible stuff you might say. However, banks have been overly prudent and valued their CDO portfolios at zero.

This is beneficial to the banks in two ways. One, it might be accurate and they don't want further losses to be realized in the future if they can possibly help it. Second, even if zero is not an accurate valuation, there's no harm in keeping capital off the books right now, otherwise they'd only have to go and lend it and/or pay tax on it. And let's face it, the banks don't fancy lending more than they have to in this market - the borrowers are looking less than triple A rated right now. And paying taxes is a mug's game, as any banker knows.

Why don't we just say this: We know your portfolios are not actually worthless. We could say that CDO portfolios' new floor value is [*plucks figure from thin air*] 15 percent of par value. We could do this by just making it a rule. We could go further and say that this rule will only be in place for one tax cycle, the time it will take for the vast majority of banks to complete at least one tax return.

Banks will then have to release some cash from being stashed aside under capital adequacy regulations and bring it back on to the books, where it will be available for the government to take a big swipe at. If the banks don't want the government to have some, they can always put it to work by normalizing credit conditions for the private sector. In reality, it will be a mix of the two, and the government will end up with a healthier private sector to tax, so the result will be the same anyway.

The government will then have a nice chunk of tax from the bank. There will be a healthier private sector paying corporate tax, and more employees to paying income tax. There will also be less unemployment benefit to pay.

Banks will be able to say that they've helped the economy out when all they've really done is revalue their portfolios ahead of time, thereby bringing forward taxes they would have paid in the future.

Job done.

So where did I get 15 percent of par value from? Actually, I confess, I am a bit of a geek when it comes to math, and despite being a headhunter, I can hold my own in a conversation with a quant. It's public knowledge that even in 2008, CDO portfolios were still realizing 25 percent of par and that's when they were considered really toxic. I also know that everything is only worth what you can sell it for, and there aren't many buyers for CDO portfolios right now, so I am not suggesting anything actually gets sold. However, it's a bit naughty for banks to use capital adequacy regs to suppress revenues and profits and behave oh-so-piously, when the economy could do with some pragmatism and honesty. Having discussed the numbers above with people who are Quants, 15 percent of par is a figure that would be really hard for banks to kick up a fuss about.

And 15 percent of the CDO market is a really big number - big enough for us to do what we need to do with the economy.

Yours in hope,

Johnny Walker

Magnus Walker & Partners

www.magnuswalker.com

This article first appeared on our UK site but could apply here as well.

Agree or disagree? Feel free to comment below.