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Blank Check
BLANK CHECK....There seems to be a growing consensus on the left that if the American taxpayers are going to give Henry Paulson a blank check to bail out a bunch of investment banks, then the American taxpayers ought to get a piece of the action in return. For example, here's Robert Reich:
The government (i.e. taxpayers) [should get] an equity stake in every Wall Street financial company proportional to the amount of bad debt that company shoves onto the public. So when and if Wall Street shares rise, taxpayers are rewarded for accepting so much risk.
Maybe this makes sense. But I wonder: do we really want equity stakes in all these firms? I don't. I'd rather have senior debt. Besides, I'm not sure I especially want the federal government to own half of Wall Street anyway.
So here's another idea. Instead of an equity stake, we offer ailing banks the following deal: the taxpayers will buy your toxic waste for 20 cents on the dollar. (Or 10 cents or 30 cents. Whatever.) We'll hold it for a maximum of 24 months, at which point you can buy it back from us at, say, a 10% premium, and then sell it off yourselves. If you choose not to buy it back, Uncle Sam will sell it off. If we sell it at a profit, we'll keep the upside. If we sell it at a loss, you guys will make up the difference. The payback terms will be, oh, let's say three points above LIBOR over five years.
And what control do the banks have over how much we sell this stuff for? None. They have to trust us to get the best possible price. To coin a term, they have to give us a blank check. Seems like a fair exchange.
Am I mistaken in thinking that AIG, Freddie, and Fannie are done deals and that the $700 billion is above and beyond them?
Happy October surprise!!!
[Invisible Hand slaps Kevin Drum across the face, twice, once going forward, again on the return]
http://corner.nationalreview.com/post/?q=ZGE5MmE0YmRiODA3YTRiNzFlN2FmNDU...
And the right agress...
You want an equity stake because of leverage issues - debt to equity ratios. Unless you've decided to throw out the entire past century of Prudential Regulation in terms of prudent bank capitalisation?
Banks need to "de lever" or reduce the amount of debt relative to their equity.
Your proposal would (as your man Krugman noted in explaining some of the issues involved in the rescue - I mean bloody hell man, if you're going to cite him approvingly, you should have some glimmer of understanding, eh?) reduce asset value, and provoke another round of contraction. You'd be shooting your own fool foot off.
Taking an equity stake with special rights (or a convertible note treated as equity in the regulatory capital) would address the problem of recapitalisation (equity raising) that your entire banking system appears to be facing (and perhaps Europe as well).
Layer on all kinds of rights mate, but it's the equity that's needed, not some bizarrely idiotic scheme like yours.
Hey, I've got a weird idea.
How about if we tax the rich to the tune of $700 billion over the next 5 years, in order to pay for the bailout? (Some specific ideas at the link.)
If they pay for it, it won't matter if it's a good idea or a bad idea to write this $700 billion check, right?
Their money, their bailout, no harm, no foul.
The real problem, of course, is that they want the rest of us to be the ones on the hook for the $700,000,000,000.
Maybe this makes sense. But I wonder: do we really want equity stakes in all these firms? I don't. I'd rather have senior debt. Besides, I'm not sure I especially want the federal government to own half of Wall Street anyway.
I don't want the Feds to own half of Wall Street either. But that's the thing - at 700 billion-1 trillion dollars, they can own all (of the banks) on Wall Street. And if I did that, I would not need to legislate executive pay cuts, mortgage renegotiation, the elimination of derivatives and so on and so forth.
Why rent [*] when you can BUY?
[*] at the same price?
max
['Geez, at this point we are already running half of Wall Street.']
The Lounsbury: Layer on all kinds of rights mate, but it's the equity that's needed, not some bizarrely idiotic scheme like yours.
Nominally agree. Somewhere in the pile must be provisions for reducing debt-equity ratios; more equity won't automatically achieve that.
It is clear that there are many holes in the proposed bailout. There is nothing in it for the taxpayer and the homeowner. Everything is about the (investment) banker, both domestic and foreign. As you pointed out, many economic experts came out to oppose the proposed bill. Why can't Congress include a couple of simple yet powerful provisions into this bill to look after US taxpayer interests (e.g. getting equity or senior debt of banks being bailed out) and US homeowners (e.g. allowing bankruptcy judges to lower principal and/or interest on a case by case basis).
What will Bush do? Veto it?
The other important part is to ensure that the money is spent in an orderly fashion. If Obama wins in November, Paulson, with no oversight on his actions (as currently proposed), can spend all the money bailing out whoever he damn pleases. Paulson will have two months between Nov and Jan to do what he damn pleases with hundreds of billions of dollars. Congress should ensure that there is some accountability.
The homeowner rubbish if populist rot, and lowering the debt on houses (case by case, impossible to work out; across the board, you will reward real moral hazard on part of Real Estate speculators large and small) penalises the prudent homeowever and the whole class of renters - who are also taxpayers - for the overdone American obsession with "owning houses" at any cost.
You, in short, rob Paul the Taxpayer to reward a whole class of dubious (once one stops being an emotional leftist git) "stakeholders" and run the risk of continuing the very bad habit of over leveraged households.
Some trust to take ownership of housing stock and maintain, perhaps.
If US taxpayers get a Sr. equity stake with bondholder type rights on top, you might come out of this okay, even quite well with a more sustainable debt culture and a Wall Street that has had enough pain to last a couple of generations to help sustain credit discipline.
I think that the bailout should be contingent on repeal of the 2005 Bankruptcy Bill.
Simple, and to the point. Why should we offer protection to the people who lobbied to remove protections for hard working Americans?
Equity gives the government regulatory authority over the particular banks in proportion to the amount by which they f'd up by buying subprime-backed securities. And once equity is achieved, the legislature can be cut entirely out of it. If the banks want to buy back their souls, they're going to have to pay.
By the way Drum: you might try reading this one for comprehension: http://www.clusterstock.com/2008/9/the-critical-question-about-paulson-s...
"I think that the bailout should be contingent on repeal of the 2005 Bankruptcy Bill."--pansauce
But then Democrats would have to admit voting for the bankruptcy bill was an error.
And powerful people shouldn't have to admit making mistakes to get the right to spend taxpayer money.
Wall Street wants to know how much their sheetpile is worth? I have a proposal: let every American just stop paying their mortgages and credit cards. Then they'll know.
"But I wonder: do we really want equity stakes in all these firms? "
No way in hell. The closer the government is to the market, the more dependent on the market it becomes. The market already has too many ways to influence the government. What little influence the working class has on policy will evaporate. S**t, the whole thing could turn out to be a coup for the scoundrels if it happens.
I'm sure the financial institutions are in deep trouble. But they've been in deep trouble for a few years now. Now suddenly, we're a mere handful of days away from a complete melt-down, the big D? We have to do something now to avert world-wide imminent crisis?
Please, everyone, take a breath. Think a minute, and remember with whom we're dealing. This sounds like a suitcase nuke to me. George Bush is on his way out the door, and he's stampeding us into handing him and his cronies a trillion dollars. Remember this is George Bush. We not only cannot trust him with the solution to problems. There is no evidence that we can trust him with his identification of a problem. He not only does not have our interests at heart or values in common; he is not only incompetent; he is also a liar and feels no shame in telling a big whopper to get what he wants.
Kevin: I don't think you understand the problem if you want debt instead of equity.
I will give you all the debt you want if you keep my firm from failing. I will take your money and go to Vegas and put all the money on lucky number 19. If I win then I pay off your debt and keep all the profits myself. If I lose ---- my firm was failing anyway so I didn't lose anything.
The net affect of you taking debt is that I get one more chance to roll the dice (McCain's favorite game). The net affect of you taking equity is that you share in the upside.
Do you agree?
So here's another idea. ...
Fundamentally, all we're talking about is a way to minimize the cost of the bailout to taxpayers. I'm a little hesitant about the government playing Wall Street investor as an appropriate mechanism (whether debt or equity).
The government has historically used a simple mechanism: taxation. So why not in this case? While the details might take a while to work out, defining the scope should not be that difficult, and certainly the intent (to the same level of specificity as currently in Paulson's proposal), should be achievable in short order.
And that tax will continue until all monies owed for the bailout are paid, with interest. That makes it in everyone's interest to this as short, simple and as cheap as possible.
who are you asking, Kevin?
nobody here can do anything about this. we're going to get what we get, and like it.
Dear God, I actually agree with the Lounsbury. Reducing principal is off the table. Bailing out those stupid enough to buy in a bubble market is a huge moral hazard and an insult to all of us who bought within our means and have never missed a payment -- you know, the RESPONSIBLE individuals.
Anonymous posted this and I think it needs to be in this thread too:
Declaring existing CDS's void might just work. The ever-brilliant "b" at Moon of Alabama explains.
http://www.moonofalabama.org/2008/09/solution-declar.html#more
Let's be honest...
There is a growing consensus on the left AND RIGHT that taxpayers are going to give Paulson a blank check.
I haven't come across a single blogger left or right that thinks the plan as written is any good.
Dear God, I actually agree with the Lounsbury.
You are forgiven, my child. This once.
Actually I think if Obama doesn't reject outright Bush's plan, that Obama will lose this election having already caved on FISA.
It's a crap plan that Bush wants, so Obama should be able lead, not merely follow, and if he fails too, that good-bye Obama.
ON an entirely differnt note, I found this quilter blog where this person created a quilt that looks just like stain glass to me, with master touch whe it comes to design. A breathing taking piece of art.
I know that Mrs Drum is a traditionalist in the quilting world, and I love that kind of quilt too, myself, but sometimes someone creates something that is profoundly beautiful in it's own right, modern as it may be that it's amazing what someone is able to do with little pieces of fabric.
Pretty simple = debt trumps equity. Both have risk. Which would you prefer?
Actually Kevin, if liquidity is the key issue, then your plan might work, with one caveat mentioned already. If the issue is lack of equity, then The Lounsbury is correct. The two year window in your proposal gives markets a chance to recover so you sell stuff that's currently undervalued; wait until markets have time to adjust; then buy it back. If you sell off stuff that you've already written off more than the discount, then your equity could actually increase. However, if the problem is lack of equity, then fundamentally you're toast with institutions losing equity in your scheme.
The other complicating factor raised its head in the solution of the S&L crisis. Regulators were slow to close many "zombie thrifts" - thank you Senator McCain - and that ended up increasing the closing price tag from something perhaps in the range of $20-50M to something in excess of $200M as many zombies, playing with our money, did go "double or nothing."
First blood
McCain wants to limit execs to $400,000
Sen. John McCain (R-Ariz.) said Sunday that bank executives who take the mortgage bailout should have an annual salary limit of $400,000, a substantial pay cut that could dramatically reduce participation in the program.
...
"Obviously the rescue is absolutely called for," McCain said. "I respect and admire Secretary Paulson. But as far as I can tell, we're placing all those responsibilities in the hands of one person. I think we need to appoint an oversight board of the most respected people in America, such as maybe Warren Buffett, who's a Obama supporter; Mitt Romney, Mike Bloomberg, so that there can be some kind of oversight of, instead of just putting all this responsibility on a person who may be gone in four months."
McCain comes close. If Obama comes down even harder on Wall Street then his vote is mine.
This is not a liquidity crisis, it's a solvency crisis. That's presumably why we're footing the bill for taking the bad debt off the balance sheets of the commercial and investment banks.
Besides the fact that it may not work, I'm also concerned about the take-it-or-leave-it terms the Bush administration is giving to Congress.
Secretary of the Treasury Hank Paulson is asking for $700,000,000,000. That's $2,333 from every man, woman, and child in the United States.
In exchange for that money, Paulson is unwilling to accept any demands to make markets more transparent, limit executive compensation, or assist homeowners fighting foreclosure. The sole purpose of that $700,000,000,000 is to bail out Wall Street and only Wall Street, but not to fix it, or our larger economy.
He is asking to be absolutely unbound by any law when he spends that money. Here's a sample of the language the Bush administration is proposing:
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
Here's more language that allows the Fed to hire anyone and give them any status, and not only can no one do anything about, no one will even know about it:
(b) Necessary Actions.The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation . . . entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts . . .
Does this sound like a bad deal to anyone else? Just wondering . . .
What does "senior debt" mean?
This gem from the NYT: "But Mr. Paulson said that he was concerned that imposing limits on the compensation of executives could discourage companies from participating in the program."
Wow. In other words, "If you limit my salary I won't let you save my stinky white ass with taxpayers' money"
There's gratitude for you!
I believe that what Paulson already knows (but we don't) is this:
The financial sector is already toast. Virtually all of the actors who have been dealing in this toxic debt are already insolvent (if the securities were priced at fair value). This $700 billion won't save them -- or more precisely, enough of them to prevent a collapse -- and the result will be a calamity, regardless.
The only way to save any of them is to overpay for the debt. Not only is that unconscionable, the Treasury can't print enough money fast enough to save most of them. Therefore, all this plan would accomplish is to put $700 billion at the discretion of Paulson and the administration to save some of them -- their friends and the ones with the most influence.
Once we realize that the financial sector will collapse in any case, our thinking changes drastically. Instead of pretending to try to stop the unstoppable, we need to figure out how to mitigate the effects of this disaster on the people and taxpayers of the United States, especially the homeowners going into foreclosure.
Meanwhile, I think we should let the free market forces do their will. Let the unregulated financial firms just go belly up -- and straight into the arms of Federal receivership, just as if they had been regulated S&Ls and banks. We can set up a real RTC just as we did in the 1980s.
First, I don't see how the financial companies are expected to handle writing off somewhere between 500 and 800 billion bucks. It's the huge hole in your plan. Second, it's just a long term repurchase agreement, and by setting a two year deadline to hang over Wall Street's head, you're basically betting the markets are irrational now, but given a couple of years to come to their senses, will be OK when it comes time to auction all this stuff off. What happens if it doesn't? What happens if banks have to make good on the difference in a loss that could be hundreds of billions of dollars, on top of what they are already writing off? I also wonder what effect knowing that amount and kind of debt is waiting to be unloaded in two years would have on the credit markets. At this point, any plan that doesn't bring with it a sense of finality (like this one) carries a good probability of failure, and there is no room for failure.
There's also the lack of a reform piece. A plan that does not include integral reform is only treating symptoms. Bush's "plan," by design, of course, does not include reform, but any grownup plan ought to, because once the crisis passes, the opportunity to implement meaningful change passes with it. Once they are out of the woods these guys are going to crack the whip, and their servants in Congress will rush to obey. Who's going to resist them then? The Democrats?
"Besides, I'm not sure I especially want the federal government to own half of Wall Street anyway."
Well, it is now obvious we, the labor element, are financially responsible for any excesses of the market, so is not the logical conclusion that Wall Street gets the right to any excessive profit, while socializing any potential losses? I would call the person who decides winners or losers in this system a dictator.
How the heck does this bailout ensure that this will not happen again in twenty years?
It doesn't, so it will inevitably happen again. In fact, this plan gives an incentive to these companies to make just as many risky loans in the future. The Republicans will never agree to more regulation, that is why the want to push this through quickly, without any new enforcement or regulation stipulations. This is a false emergency, just as Iraq was a false menace. Same marketing, different day.
I seem to remember that they busted Capone for tax evasion, they surely could dig up some arcane laws to squeeze the Wall Street fat cats to pony up a couple hundred billion to keep themselves out of jail. We probably wouldn't even have to take more than 10 private islands, or 250 private jets.
Then again, Napoleon's guillotine idea seems like an idea we might want to dust off. He was able to get good financing for his wars that way. I bet it wouldn't take more than 10 or 20 be-headings to get the other "masters of the universe" to gladly come to terms with the government.
But, since Americans are just weak sheep, we will just bleat a little harder at this latest blatant shearing.
Don't think you understand this, Kevin.
Lounsbury is correct above. Buying at 10, 20, 30 cents on the dollar, simply means a greater contraction, which this is trying to avoid. You want capitalization.
Pondering a bad history, I predict conservative philojudaeism begins a long, slow, inevitable rollback, starting just a few days ago.
Is this bailout about cronyism? One can't fail to notice big time Wall Street players in the public sector helping out old buddies. Does ego account for the importance they attach to the financial sector? I was under the impression that much of the innovative investment instruments ended up in the hands of foreigners. If we don't know where it is, why not wait for the musical chairs to play out and see who is holding the bag? If the Chinese hold a lot of bad paper, they have plenty of cash to play with anyway, for ex.
If we subsidize the low end of the economy with illegal alien labor, and the financial sector with tax dollars, why not do something for the bleeding manufacturing sector? Communism, for lack of a better term, is good.
Besides, I'm not sure I especially want the federal government to own half of Wall Street anyway.
Why not? Wall Street owns half of the federal government. At least.
See, now we should'a just gave those poor boys on Wall Street the nations Social Security Trust Fund like "W" wanted...since they got anyway, we might'a avoided this little hickup
I don't see how buying the toxic assets at 20/30 cents on the dollar means greater contraction.
The i-banks can't raise money because their equity is worthless, in large part because of the value of their assets are either plummeting or they are unknown.
If you take away the bad assets, you still have an over-leveraged company but then you allow THE MARKET to recapitalize the likes of Goldman or Morgan Stanley and NOT THE TAXPAYERS.
The market wouldn't step in to save Lehman because they knew they were just trying to catch a falling knife of bad assets. Take that problem away and the likes of BofA, Citi, HSBC, etc. would be glad to step in a buy the i-banks for a song.
Again, the problem we should be solving is the asset side of the balance sheet.... let the market solve the liability/equity side.
"... I think we need to appoint an oversight board of the most respected people in America, such as maybe Warren Buffett, who's a Obama supporter; Mitt Romney, Mike Bloomberg, so that there can be some kind of oversight ..." -- McCain
"McCain comes close. ..."
Posted by: rory on 09/21/08
--------------
True to himself McCain shows his mavericky side by mentioning Buffet and Bloomberg, but right to the heart of who he is he picks ONLY very rich insiders who know the game, how to play and who reflect Wall Street, but not America.
John McCain is in his very heart an insider who is advised by insiders and who responds to insiders and not America.
John McCain should be rejected.