Mother Jones - Comments for "Playing Pattycake?***"

So, yes, the government did not get a good deal. This, however, is not surprising, since the government is not a profit-maximizing entity.

Nonetheless, Kevin Drum ("Quote of the Day," 10/1/08), echoing Brad DeLong, insisted that Paulson would in fact exact the full pound of flesh from the banks in return for keeping them solvent. Point is, they were quite wrong. Some acknowledgment of that fact would be appreciated.

I agree that the taxpayers did not get a very good deal, but some commenters' arguments here are just wrong.

First, the banks will not be able to pay out dividends using the government's money. Since the government stake is preferred stock, no dividends can be paid to common shareholders until the full preferred dividend is paid. The banks will need to invest the government money in order to avoid needlessly diluting common shareholders.

Second, existing shareholders are in fact diluted by this deal (just not much). Even without the warrants (which are obviously dilutive), the fact that some dividends that would have been payable to common now must go to the preferred shares is inherently dilutive, since the value of any stock is nothing more than the value of future dividends.

Finally, while I understand the sentiment that injecting capital into healthy banks is a waste of money, this too is incorrect. Healthy banks that have additional capital are in an immediate position to lend that money out at full leverage (~10x). By contrast, undercapitalized banks will have to keep some of the new capital in reserve to shore up their balance sheets. Since Paulsen and Bernanke's goal is to increase lending, what they did is the right way. Furthermore, as has been pointed out elsewhere, Treasury and the Fed had an interest in not stigmatizing banks that participated.

So, yes, the government did not get a good deal. This, however, is not surprising, since the government is not a profit-maximizing entity. Its goal was to increase lending, and since the government itself has a very low hurdle rate, it could afford to offer capital to lend at very attractive terms to the banks, and that's what they decided to do. Considering the desperate situation, that seems to be a decent course of action even if it fails to punish (and may well reward) those responsible for the crisis in the first place.

Presumably we will soon be hearing stories about large bonuses being paid to failed bankers that were enabled by the bailout.

I am a Citigroup shareholder, and what is to stop me from introducing a resolution at the next shareholders meeting to pay out a $25 billion special stock dividend?

One never knows what happens in this elite club of CEOs and Paulsons.
I am trying to figure out why State Street and Bank of New York Mellon got a piece of the pie (albeit, a smaller billions chunk).
My understanding is that State Street and BNYM are not really banks (commercial or investment) but the processors for "the" banks transactions. I know much of the stock market to bank processes go through BNYM.
My question then is are we "pseudo" nationalizing "the" banks along with the processors too?
hmm, maybe these processors were actually dabbling in some mainstream banking too.

Note that by contrast, the UK banks that are being bailed out have seen their share prices hammered - in large part because part of the deal is them cancelling their dividends until the government gets its money back. This looks a lot more like punishing bad risk taking while still avoiding damaging the system.

rational >"...There is plenty of private money around the world that would have, with terms such as those offered to Buffett, would have loved to participate in investing in US banks...."

That is true but "the smartest people in banking" wouldn`t have been able to continue their top monkey high-roller game if they had to accept money from Abu Dubai, China, Saudi Arabia etc soverign wealth funds.

Wake up folks !

"Revolutions, before they happen, appear to be impossible and after they occur they appeared to have been inevitable." - Alexis de Tocqueville

I don't know what the big surprise is about these stocks bouncing up. It is not like any of them (that I have looked at) came back up to anywhere near what they've been over the past couple of years. Sure, a 25% gain on ML is nice, but the stock has been hammered this year. This is not surprising at all.

And Re: comparisons to Buffet's GS deal... I'm sure they were feeling a lot more desperate at that moment than they are now.

When the market crashed, I thought to myself, I though, "You know, godoggo, it's kind of a shame about you not having any money, because now would be a good time to buy some stocks, so you can sell'em real quick when they bounce up again." That's what happens after a crash. They bounce around for a while. Maybe the news triggers it. Maybe not. Who knows?

What I got when I linked to and quoted Kevin's post from a couple weeks back, saying Paulson was going to give the Wall Street bankers no quarter:

"Thank you for commenting.

Your comment has been received and held for approval by the blog owner.

Return to the original entry"

This is getting spooky.

OK, now let me try the comment I'd originally intended.

jerry - here's the link.

"It's worth noting that when Paulson submitted the initial 3-page bailout bill that gave him czarlike authority to do anything he wanted with his $700 billion, it was a huge tactical mistake. He was treating Congress the way he'd treat a Wall Street adversary, and that was a very bad move. But it doesn't mean that he wanted unfettered authority to make sweetheart deals. It's actually more likely that he wanted unfettered authority to rape and pillage."
-Kevin Drum, October 1, 2008

Oops.

That's weird. Any posts I've attempted lately that had actual content in them have been blocked.

test post

The biggest problem here is that Paulson has wasted our money on banks that were already well capitalized. When you recapitalize banks in this way, you ought to aim for those banks in the fat part of the curve; the 25% at the bottom will fail anyway, and the 25% at the top don't need our help. So Hank Paulson, incompetent as he is, aims squarely at the top. Heckuva job, Hank.

It could be argued that you need to recapitalize the healthiest banks so the weaker ones will follow along, but that's just not the case. The weaker banks will go along in any event, it's a simple matter of their survival.

The other problem with Paulson's recapitalization scheme is lack of board representation. Only a fool would put that much money on the line and not demand a seat on the board.

Kevin circa a week or two ago: Paulson's going f these guys over. Kevin today: Yeouch!

This is what Buffett got for his preferred shares:
* 10% dividend yield
* 10% premium to par upon call
* 100% of mkt cap of pfd stk in warrants to buy common stk.

This is what Paulson got for the taxpayers' preferred shares:
* 5% dividend yield (9% after 5 years but they'll most likely be called away after 3 years, so 5% is the effective rate)
* par call (0% premium)
* 15% of mkt cap of pfd stk in warrants to buy common stk

So the taxpayers get less current yield, less upon call scenario, and far less upside. And the terms are far more generous than what I've seen in the convertibles / pfd.shares+warrants mkt. Sure, the US govt has lower cost of capital than Buffett so Paulson could have had less onerous terms for the banks and still make the same expected profit, but this is bending over backwards. Very little surprise that the banks all took it without complaint (esp. since the terms didn't include covenants that were discusses as possibilities).