I'm feeling unhelpful, because I've complained bitterly about the Paulson Plan and been cool towards the Dodd Plan, but my own suggestion was an obvious nonstarter. We mustn't offend the delicate sensibilities of creditors, or God forbid give them a haircut. So, really, what would I suggest?
I wonder, what was wrong with the AIG (AIG)/GSE model? The government has already published a pretty exhaustive list that includes the systemically important and potentially vulnerable financials along with many other firms — the "no short" list. Suppose Congress passed a law providing for fast-track reorganizations modeled on AIG. Firms on the "no short" list would be required to consult with the Treasury prior to any bankruptcy filing, and listed firms would be presumptively eligible for an AIG-style bailout. During an insolvency, the government would take warrants on 79.9% of firm stock, in exchange for a loan or preferred equity infusion sufficient to cover obligations to creditors during an orderly wind-down or reorganization. Existing management would be replaced, and government auditors would examine firm accounts to ensure that there were no "fraudulent transfers" precipitating the bail-out. Any such transfers discovered between the listing of the firm and the reorganization would be criminalized, and prosecuted vigorously. Listed firms would have a fiduciary obligation to the government as well as shareholders, such that "gambling for redemption" near insolvency would also place firm managers in criminal jeopardy.
Temporary routinization of AIG-style bailouts would put skittish creditors at ease. Although Treasury would retain the right to opt out and permit a traditional bankruptcy, the default course of action would make creditors whole. Equityholders and management of listed firms would have a strong incentive not to take the government up on the bailout if they have any prudent means of avoiding it, since they would lose nearly everything. Taxpayers would own the firms they rescue, and would enjoy the upside of successful reorganizations or divestitures.
Like all the bailouts, this scheme rewards the moral hazard of creditors, and I hate that. There is the danger that it would not be temporary, and that promised regulation to restrain leverage would never materialize, leaving only a subsidy to future blackmailers. Still, I think it's a lot better than silently and opaquely recapitalizing firms without replacing management or forcing at least shareholders to take a hit.
AIG-style bailouts would stigmatize firms that take advantage of them, as any form of bankruptcy does, but many firms do successfully reorganize from bankruptcy, and the stigma would be well deserved. The process would be transparent.
That many firms would not survive their brush with insolvency in anything like their original forms is a positive. I strongly agree with Barry Ritholtz, quoted in a piece by David Leonhardt:
If Chrysler had collapsed, [Ritholtz] argues, vulture investors might have swooped in and reconstituted the company as a smaller automaker less tied to the failed strategies of Detroit’s Big Three and their unions. “If Chrysler goes belly up,” he says, “it also might have forced some deep introspection at Ford and G.M. and might have changed their attitude toward fuel efficiency and manufacturing quality.”
If we do end up with a gentle, behind-closed-door bailout of financials, I'm afraid that in twenty years, we may view lower Manhattan the same way we see Detroit today. What Wall Street needs is what it has delivered to so many other industries, a dose of Schumpterian creative destruction, to make room so that better things may rise up from the ashes.
p.s. I do hope to rise to Dani Rodrik's challenge and be concrete about what "better things" might look like, but, alas, my bitter obsession with the looming bailout takes priority.
p.p.s. Since the government has stormed the commanding heights anyway, does anybody else think it'd be a good idea for some bureaucrat to declare a ban on dividend payments for all firms on the "no short" list? This would have the effect of helping troubled firms preserve cash, while softening the hit individual firms would take if they announce dividends cuts. Firms on the list would have no choice, and only a small minority of "no short" firms are in crisis, so there should be no stigma.
- $85B line of credit for 2 years.
- AIG pay a 2% upfront commitment fee (reasonable..its like paying 2 points)
- AIG pays 3% + Libor = 11.5% for any balance that it draws on (a little high but still ok)
- AIG pays 8.5% on all UNDRAWN line of credit..(a little harsh here..Why call it a line of credit if you going to have to pay on the undrawn balance at 8.5%)
- AND...Govt get 79.9% preferred share (without giving the existing shareholders an "effective" vote since their vote are diluted now.)
Govt indicated that if AIG fails the financial system may collapse...Wouldn't that mean that it will hurt ALL taxpapers? So Govt do this to bail out AIG? But who really gets pay out at AIG? Not the shareholders, the CEO is gone...Isn't it really the Govt bailing out the financial system and taxpapers at AIG's shareholders' expense?
Could you please explain if the "TARP" will require appraisals being completed on all the real estate holdings?
Will the government will require appraisals for all of the assets they’re purchasing?
If so, would it be outsourced or would they do it internally?
What are your thoughts on how the bailout will affect appraisers?
"Still, I think it's a lot better than silently and opaquely recapitalizing firms without replacing management or forcing at least shareholders to take a hit."
A 80% hit and a payday loan at that!
I think Paulson has some unresolve feels regarding AIG to set it up as he did; while Morgan Stanley and Goldman Sachs got the sweetest deal by the Fed turn it into a bank holding company! Where is the "hit" to those shareholders?
share to go down to $2, and also, the gov. does not point
a gun at AIG and order them to accept the loan. Why some folks think of the gov. as "Loan-Sharks" ?
Any taxpayer want to sign up for this type of loan?
On Sep 28 03:22 PM Another diluted shareholder wrote:
> The banks would be significantly more profitable if they adopted
> the Fed's strategy, give you a motgage on your house at atrocious
> rates and once you pay it off they still own 80% of your house, which
> they can sell at a profit when they wish. Not a bad deal, but the
> Fed's would probably have a law that would make it illegal, unless
> your the Fed's of course.
> Any taxpayer want to sign up for this type of loan?