Having read through the criticisms I linked to in my previous post, I'd like to take a stab at defending the Paulson plan. I think it could work IF it acts as a catalyst for future positive events rather than being seen as the end in itself, AND if the Treasury, acting as a self-interested capitalist on behalf of taxpayers, exerts the pitiless leverage befitting a rescue financier. I see the favorable scenario as follows:
1) Treasury purchases toxic debt instruments from financial institutions at a not-crazy premium to their balance sheet values. 600 million fingers are then crossed in the hopes that it did not overpay, something that won't be known for years.
2) This has the effect of modestly increasing the stated book value of these financial institutions. More importantly, with the toxic waste off the books, it improves the likelihood that an outside investor--Treasury itself, a sovereign wealth fund, even our man in Omaha--now feels able to value the enterprise. Hold your nose and admit it: the relatively few franchises that manage the capital raising and M&A activities of Corporate America are worth a lot.
3) Said outside investors collectively have enough capital to recapitalize the major Wall Street insitutions via injections of new equity. Here comes the tricky part: In exchange for their largesse, both the outside investors and Treasury (e.g. via warrants struck at the same price as the outside investor) must be allowed to invest on very favorable terms. In a perfect world existing equity holders and stock options would be essentially wiped out, a la AIG. In an even more perfect world, existing debt holders (i.e. unsecured lenders to Morgan Stanley, Merrill, etc.) would also take a big haircut, just as they usually do when corporations declare bankruptcy.
4) Both liquidity and solvency are restored, credit starts to flow again, and the downward spiral of asset sales is prevented, allowing whatever pain will occur to occur over time, and to be spread widely.
Another potential defense of the Paulson plan: as far as I can tell, the plan does not specify when Treasury is obligated to buy toxic assets, nor does it prevent Treasury from doing another AIG. Conceivably it could wait until the maximum moment of pain to get the best price possible for its assets. Or it could continue to do AIG-style bailouts followed by purchases of the toxic assets, in a sense bailing out itself. Suppose for instance that tomorrow Treasury buys AIG's entire CDS book at something close to market value--wouldn't it instantly make a lot of money on its $85 billion bailout, while over time perhaps making money on the CDSs?
Question: Above a certain level of size and complexity and unfairness, does it not become preferable for Treasury to chuck this plan and instead simply provide relief directly to people having trouble paying their mortgages (thus indirectly making whole the holders of mortgages, MBS and CDOs)? Could the government do a massive sale/leaseback of houses, buying mortgages and charging rent to former homeowners in lieu of foreclosing? The government as quasi-landlord, you say? I can see an example of this as I look out my window, and it's not that bad.
This article has 16 comments:
"toxic waste off the books, it improves the likelihood that an outside investor--Treasury itself, a sovereign wealth fund, even our man in Omaha--now feels able to value the enterprise." Observe that he forget the concept of a market altogether, and the allusion to Buffett was a throwaway, window dressing to hide the agenda of Paulson as sole arbiter of what's worth what henceforth.
"Hold your nose and admit it: the relatively few franchises that manage the capital raising and M&A activities of Corporate America are worth a lot." He means GS, Paulson's shop. Everyone else second in line, and they better say pretty please with sugar on top. Are the regional banks and brokers anywhere on the radar. Hell no. That's where Mom and Pop have checking accounts and CDs. What about the pension funds? No M&A, no bail-out. You heard it here first.
1st of all the plan could be sucessful ONLY if the treasury can sell debt. since the largest holders of cash have already invested quite a bit of money in those banks as equity, they should get a deal, meaning hunky has to stick it 'capitalistically' to the taxpayer.
Why should the US tax payer buy toxic waste at a premium to book value when it is trading (if at all) at a deep discount to book value.
In free market capitalism, which is what Wall Street is all about, the fittest survive. JP Morgan and Bank of AMerica will survive along with Wells Fago and a few other banks who did not take part in the sub prime party. Why should anyone, especially the US tax payer bail out the banks who could not manage their risk prudently.
By the way, I have worked for Lehman Brothers, Merrill and Citigroup. Lehman had some very smart people working at the firm especially in fixed income. How they got it all wrong only those still working there can tell. However, while I sympathize with those who lost their jobs and saw the value of their equity go to zero, these folks will not be losing their homes. My sympahies therefore rest with those who lost their homes due to foreclosres and predatory lending.
The government should take steps to bring to justice the predatory lenders at the mortgage firms and nstead of bailing out the wall street banks the government should bail out the homeowners who lost the roof over their head.
This bailout plan will NOT work as it has prven to NOT work for a while. Bernanke and Paulson kept saying the worst was behind us but they have been proven to be wrong. These were the men at the helm of affairs when this problem was created and now how can we expect them to solve the problem that was created on their watch. Where is the accountability in our government and in our society.
There is an interesting article on seekingalpha on how the ban on short selling is going to have a very negative impact on the optons markets. Paulson in particular should have known this because he worked at Goldman Sachs. Now mutual funds and other investors who legitimatel want to hedge their exposures to insolvent financial institutions via options will simply not be able to do this.
Changing the rules of the free markets mid-sea is not a solution. I will only make things work. We need to let the bad banks fail and then from those ashes let newer and good ones rise. Most of our banks are run by deadwood. Let the deadwood get cleared for the future of our country and our banking system.
You say that fingers are crossed that the Government will not overpay for the assets, ne toxic waste.
There would be no need to put in any government money if there were any intention of paying the market clearing rate, they would sell for a few cents on the dollar.
The whole point of the scheme is to overpay, and take money from the taxpayer for those who created these pyramid selling frauds based on the house markets.
Paulson also wants to cream off fat fees in 'administration charges' to his buddies for doing the stealing, whilst wrecking the Constitution by making these frauds not subject to the Court or subject to review,
Congress is vetting him now and will uncover his involvement in the derivatives market.
From Head honcho to handcuffs!
It enables an estimated 400,000 borrowers / home owners to refiance through FHA (Federal Housing Administration )
www.hud.gov/news/recov...
FAQ
Q: Will this law be a bailout for speculators, homeowners, investors, and lenders?
A: No. It is narrowly tailored to keep families in their homes. For example: ... www.hud.gov/news/recov...
Q: How does this law help neighborhoods that have been hit by the foreclosure crisis?
The law strengthens neighborhoods hit hardest by the foreclosure crisis by providing $3.9 billion in Community Development Block Grants to states and localities to buy foreclosed homes standing empty, rehabilitate foreclosed properties, and stabilize the housing market.
Q: Will this law reward families who bought homes they could not afford?
A: Many homeowners facing foreclosure were misled, were deceived, or were in other ways the victims of unfair lending practices.
www.hud.gov/offices/hs...
When partisanship trumps reason, plenty of intelligent people make all manner of oddball claims and assertions. Enough people believe them and that's how we end up where we are today - ready to hand a blank check to a man who has proven himself to be either a terrible prognosticator or an outright liar. I have an opinion about which of those he is.
" In a perfect world existing equity holders and stock options would be essentially wiped out, a la AIG. In an even more perfect world, existing debt holders would also take a big haircut, just as they usually do when corporations declare bankruptcy. "
That's like saying "in a perfect world I'm not allowed to steal from my neighbor"
That's not in a "perfect" world, that's in a regular world.
Former RTC bought distressed assets from bankrupt companies, not from operating ones which would still be around today... You failed, you go belly up, period. There's plenty of talent in the US to start new banks and there's a bunch of banks still standing. No one is entitled to new chips when they lost them all. Is this still America?
MILLIONS AT RISK OF FORECLOSURE FRAUD
Earlier this year, federal officials announced Operation Malicious Mortgage -- 400 indictments against individuals and companies allegedly involved mortgage fraud that led to nearly $1 billion in theft. But authorities say they were only able to target the worst fraud artists.
redtape.msnbc.com/2008...
If you were to read the text of the bill the administration sent to Congress (which I wonder if this writer did) it really has only two provisions. First, give Paulson $700 billion of taxpayer money next see what happens.