This post is a guest contribution by Minyan Peter (via the Minyanville site).

Dear Mr. Secretary,

Congratulations on your appointment and confirmation. As your administration has said that it welcomes any and all suggestions, and that you are thinking “boldly”, I offer the following recommendations for your consideration:

First, immediately suspend all common dividends for TARP-recipient banks. Even a penny or a quarter is too much, given the circumstances.

Second, immediately suspend all preferred dividends for TARP-recipient banks, including any payments to the government. Inasmuch as regulators consider non-cumulative preferred stock as Tier 1 Capital, then make it act like real Tier 1 Capital. Besides, the underlying documents freely permit up to 5 years’ dividend suspension, and most preferreds are already trading as if the suspension is going to happen.

Third, convert the government’s preferred holdings to common, and offer the same terms to existing preferred shareholders. It’s time to build a foundation, not another house of cards. And honestly, no investor I know believes that Tier 1 Capital, let alone “shareholder equity,” is anywhere near tangible common equity. Force that convergence.

Fourth, cap deposit rates like you did in 1935. Right now, deposit rates are dictated in markets by the weakest financial institutions and, from where I sit, the rates completely discount the value of FDIC insurance. Even with all of the Fed’s actions, bank net interest margins are not expanding, and as a result, banks are having to reprice loans to higher and higher pricing.

Fifth, establish a financial institutions governing board made up of bipartisan leadership from Congress and representatives of the Federal Reserve and Treasury, and ask Mr. Paul Volcker to chair it. With all due respect to members of Congress, industry leaders need a single board to be accountable to – not an endless stream of Congressional committees and bureaucrats.

Sixth, within the top 25 largest financial institutions in the country, begin the internal separation of good assets and businesses from the bad. What you have started inside Citigroup (C) has merit elsewhere. After good businesses are “cleansed,” sell a small (10%-15%) minority stake in each through IPOs available to all investors. With transparency and clean balance sheets, I’m certain there will be strong investor demand. But give all investors, not just politically connected private-equity firms the opportunity to participate. And use the proceeds to replenish capital. I believe that over time – measured in years, not weeks or months — the investments in spun-off, good businesses will cover a significant amount of the losses to be incurred.

Seventh, for smaller, troubled banks, please let them fail. And when they do, transfer the assets to an RTC-like entity. Then, using a web-based auction process open to all, invite investors to bid on troubled assets. There will be plenty of demand.

Eighth, and most importantly, decide today what you want the banking industry to look like on the other side of this crisis. Whether it’s capital and liquidity requirements, deposit limits, or conflicts of interest, the time to be thinking ahead is now.

I realize up front that some of these recommendations aren’t easy, particularly the deposit cap. But I believe that we’re well past the time of easy choices. We must now choose the best least attractive option.

I hope these thoughts are helpful to you.

Godspeed Mr. Secretary,

Minyan Peter

Source: Minyan Peter, Minyanville, January 22, 2009.

Last 5 posts by Prieur du Plessis

• Gold bullion – overdue for a pullback? - November 25th, 2009
• South Africa ends recession - November 25th, 2009
• Did the SARB make the right call? - November 25th, 2009
• Ritholtz: “Buy and hold” is a disaster - November 25th, 2009
• Prieur’s readings (November 25, 2009) - November 25th, 2009