Buying Wall Street
| Fri Sep. 26, 2008 11:46 AM PDT
BUYING WALL STREET....Over at the Wall Street Journal editorial page, zillionaire hedge fund guru John Paulson outlines what he thinks is a better alternative for stabilizing markets than the current bailout plan. Paulson, of course, is famous for betting a couple of years ago that the mortgage market was going to collapse and becoming rich from his foresight, so that makes him worth listening to.
And unlike, say, the blatherings of the House Republican Study Committee, his plan isn't self-evidently idiotic. Basically, instead of having the Treasury buy up toxic mortgage securities, he thinks they should directly recapitalize the financial system by purchasing senior preferred stock in failing banks:
The financial market is stabilized, companies get recapitalized, failures are avoided, debt securities are supported, and time is gained for illiquid assets to mature.
The institutions continue to function, their cost of funding will decline as equity capital increases, and innocent third parties like bank depositors, broker/dealer clients and insurance-policy holders are all protected. The only difference is that potential losses are kept with the shareholders where they belong.
Paulson thinks his plan is superior to the current proposal on several counts — and although I'm not sure he's right about that, that's not what gets me. What gets me is that the Wall Street Journal editorial page is now running pieces that essentially suggest nationalizing failed banks — which is exactly what this plan would do if the required capital infusions are large enough (which they probably would be, since it doesn't take much capital to buy a majority stake in a failing bank). Conversely, I, the liberal, am really queasy with this notion. I'm all in favor of better regulation, but the federal government already owns one of the biggest insurance companies in the world, and I'm not thrilled at the idea of them acquiring any more of Wall Street.
We're in looking glass territory here. Am I too queasy about taking over banks? (That's a serious question. Am I?) Is the Journal too sanguine about it? What's going on?
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What gets me is that the Wall Street Journal editorial page is now running pieces that essentially suggest nationalizing failed banks ? which is exactly what this plan would do if the required capital infusions are large enough (which they probably would be, since it doesn't take much capital to buy a majority stake in a failing bank). Conversely, I, the liberal, am really queasy with this notion.
I'm a liberal too, but not only am I not queasy, this is the approach I've been advocating all along. I haven't read the WSJ piece yet, and I don't grasp the subtleties and differences between common stock and preferred stock (my common sense hunch tells me the government should keep it simple, and simply buy common stock, but what do I know), but basically, I think this is the best approach. Simply recapitalize banks that need it in exchange for equity. Let the financial institutions themselves (and the market) deal with the mortgage paper. I'd really like to keep the government from having to deal with millions of small transactions. Writing several hundred checks in exchange for shares seems a whole lot easier.
Moreover, unlike relying on the other Paulson's magic number ($700 billion) that nobody can explain how it was derived at, this lets the equity market inform us about price. And critically -- and I do mean critically -- such an approach puts a natural curb on the eventual government tab, by providing a disincentive for firms to tap taxpayer money (because they'll have to pay for such assistance with equity). Financial firms, in other words, would have a powerful incentive to only accept as much government money as they truly need. I strongly suspect such an approach gives us our best chance at having the eventual bailout "merely" cost us, say, $500 billion. Hopefully if we get the "Treasury Secretary plan-plus-Democratic-add-ons," the equity component will be sufficient to yield the same effect (but I haven't seen the details, and I'm not holding my breath).
Of course, any such legislation should require the government to eventually sell its shares. I don't think many people on any point along the political spectrum want Uncle Sam to permanently involve itself in the business of commercial banking. This should allay the queasiness of Kevin Drum and others.
One other idea: interbank, mostly short term lending seems to be the activity that we're trying to support. So, I'd like to know if there's any merit to having the government guarantee -- even if it's not on a permanent basis -- interbank lending. I rather suspect such an approach -- in addition to recapitalization efforts when necessary -- might give a lot of bang for the buck.
What gets me is that the Wall Street Journal editorial page is now running pieces that essentially suggest nationalizing failed banks ? which is exactly what this plan would do if the required capital infusions are large enough (which they probably would be, since it doesn't take much capital to buy a majority stake in a failing bank). Conversely, I, the liberal, am really queasy with this notion.
I'm a liberal too, but not only am I not queasy, this is the approach I've been advocating all along. I haven't read the WSJ piece yet, and I don't grasp the subtleties and differences between common stock and preferred stock (my common sense hunch tells me the government should keep it simple, and simply buy common stock, but what do I know), but basically, I think this is the best approach. Simply recapitalize banks that need it in exchange for equity. Let the financial institutions themselves (and the market) deal with the mortgage paper. I'd really like to keep the government from having to deal with millions of small transactions. Writing several hundred checks in exchange for shares seems a whole lot easier.
Moreover, unlike relying on the other Paulson's magic number ($700 billion) that nobody can explain how it was derived at, this lets the equity market inform us about price. And critically -- and I do mean critically -- such an approach puts a natural curb on the eventual government tab, by providing a disincentive for firms to tap taxpayer money (because they'll have to pay for such assistance with equity). Financial firms, in other words, would have a powerful incentive to only accept as much government money as they truly need. I strongly suspect such an approach gives us our best chance at having the eventual bailout "merely" cost us, say, $500 billion. Hopefully if we get the "Treasury Secretary plan-plus-Democratic-add-ons," the equity component will be sufficient to yield the same effect (but I haven't seen the details, and I'm not holding my breath).
Of course, any such legislation should require the government to eventually sell its shares. I don't think many people on any point along the political spectrum want Uncle Sam to permanently involve itself in the business of commercial banking. This should allay the queasiness of Kevin Drum and others.
One other idea: interbank, mostly short term lending seems to be the activity that we're trying to support. So, I'd like to know if there's any merit to having the government guarantee -- even if it's not on a permanent basis -- interbank lending. I rather suspect such an approach -- in addition to recapitalization efforts when necessary -- might give a lot of bang for the buck.
Submitted by Craig (not verified) on Fri Sep. 26, 2008 12:05 PM PDT.
If the financial situation is as dire as some say it is (sure wish we had more facts), then the federal government either takes over a number of banks or becomes one big giant bank for a couple of years.
One thing is for sure: our financial system is no longer being run by adults. A lot of people were fired because they wouldn't go along with the scams. It's time to bring a number of those people back.
Kevin Drum: What gets me is that the Wall Street Journal editorial page is now running pieces that essentially suggest nationalizing failed banks ... Conversely, I, the liberal, am really queasy with this notion.
Take Pepto-Bismol. That's very similar to how Sweden saved its banking system in the early 1990's, and it worked a lot better than the Japanese approach. Better to own the banks than just buy up their worst garbage.
After things improved the Swedish gov't sold their share, and the US could do the same.
"If the financial situation is as dire as some say it is, then why did the market meet word of the setback in the emergency bailout plan with a vast yawn?"
1. The situation isn't as dire as some say.
2. They are irrationally sure Congress will inevitably pass some form of bailout, the same way they were irrationally sure none of the insane mortgage/mortgage securities stuff could ever implode the way it has.
1 is possible, but 2 seems more likely.
Mike
Submitted by Brock (not verified) on Fri Sep. 26, 2008 12:19 PM PDT.
What Jim M. said.
Preferred shares don't have voting power, so it's not anything like nationalization.
What gets me is that the Wall Street Journal editorial page is now running pieces that essentially suggest nationalizing failed banks which is exactly what this plan would do if the required capital infusions are large enough (which they probably would be, since it doesn't take much capital to buy a majority stake in a failing bank). Conversely, I, the liberal, am really queasy with this notion.
I'm a liberal too, but not only am I not queasy, this is the approach I've been advocating all along. I haven't read the WSJ piece yet, and I don't grasp the subtleties and differences between common stock and preferred stock (my common sense hunch tells me the government should keep it simple, and simply buy common stock, but what do I know), but basically, I think this is the best approach. Simply recapitalize banks that need it in exchange for equity. Let the financial institutions themselves (and the market) deal with the mortgage paper. I'd really like to keep the government from having to deal with millions of small transactions. Writing several hundred checks in exchange for shares seems a whole lot easier.
Moreover, unlike relying on the other Paulson's magic number ($700 billion) that nobody can explain how it was derived at, this lets the equity market inform us about price. And critically -- and I do mean critically -- such an approach puts a natural curb on the eventual government tab, by providing a disincentive for firms to tap taxpayer money (because they'll have to pay for such assistance with equity). Financial firms, in other words, would have a powerful incentive to only accept as much government money as they truly need. I strongly suspect such an approach gives us our best chance at having the eventual bailout "merely" cost us, say, $500 billion. Hopefully if we get the "Treasury Secretary plan-plus-Democratic-add-ons," the equity component will be sufficient to yield the same effect (but I haven't seen the details, and I'm not holding my breath).
Of course, any such legislation should require the government to eventually sell its shares. I don't think many people on any point along the political spectrum want Uncle Sam to permanently involve itself in the business of commercial banking. This should allay the queasiness of Kevin Drum and others.
One other idea: interbank, mostly short term lending seems to be the activity that we're trying to support. So, I'd like to know if there's any merit to having the government guarantee -- even if it's not on a permanent basis -- interbank lending. I rather suspect such an approach -- in addition to recapitalization efforts when necessary -- might give a lot of bang for the buck.
This is pretty close to what I've been proposing. Although like any white knight, I'd want a seat on the board too. But before we invest, said banks need to take the write down on their bad debt, so we don't overpay for our stake.
And to really make the bailout work, we need to do it in coordination with foreign governments propping up their own banks.
yes, yes, yes. That's where we all know we're headed, toward the federal govt recapitalizing these institutions. That's what Japan and Sweden did, and it worked. Japanese banks are now buying pieces of American institutions.
That's why equity warrants being added on to the Paulson plan are essential, they form a bridge to the endgame, which nationalization. That's what is really freaking out the GOP.
I agree with Alex. Either you "nationalize" the bank's toxic waste and get nothing or you nationalize the banks and have a shot at getting something back. If you're going to spend the money anyhow, it's obviously better to get something instead of nothing.
Realistically, I think you are wrong in thinking that just dumping money into the system is going to solve the problem. It won't. The same people who gambled away their companies (but kept their own money safe) will simply go back into the casino and double up. The poor slobs who are barely hanging on to their houses and jobs; worrying about their retirement and sending the kids to college will get nothing out of this bailout except the bill.
And Alex is right that the semi-nationalization of private banks and financial firms has worked before, albeit on a much smaller scale. This is also similar to the Chrysler Bailout in which the Carter administration refused to simply hand over the money but instead required sacrifices and changes by everybody with an interest in saving the company: management, stockholders, investment bankers and others. And the taxpayers got most, if not all, of their money back in the end.
I continue to believe that we must demonstrate first to our leadership and then to the Republicans that there must be changes made and sacrifices borne by the people at the top who caused this mess in the first place. Otherwise, no deal.
Preferred shares CAN vote if that is the deal. In fact I will go one better, the deal could be that every $1 of preferred gets 10 votes to every 1$ of common. Every corporation is differant and there is no reason that can not be the deal.
That aside, if you decide that we, the people, need to put money in the best deal we could get is to take a preferred position.
Submitted by Anon (not verified) on Fri Sep. 26, 2008 12:37 PM PDT.
Nationalization is not intrinsically evil. The contention that it is is just more nonsensical religion-ideology. Its just another tool to accomplish public policy purposes. And it is by far preferable to the current bad debt sequestration proposal. Long term, you will need to consolidate American banking into a handful of very large well-capitalized corporations with conservative lending practices. Having a public investment component will help bring this about. Having a firewall between banking and insurance also seems to be a good idea as well. Transfer all the medical insurance business to a public single-payer entity and along with the other measures you have the nucleus of a contemporary banking system. But you are a long way from that today and individuals will suffer as a result, particularly the working poor who were gulled into signing these ridiculous teaser rate mortgages which are now worthless. Come to think of it, you probably also need a public housing ownership entity to actually convert the hundreds of thousands of foreclosed properties to rentals or lease to own. Otherwise they will just sit vacant while the trailer parks fill up to bursting and people just getting angrier and angrier at their failed institutions. The anger is the real danger since fascism grows from such seeds of despair.
Submitted by serial catowner (not verified) on Fri Sep. 26, 2008 12:37 PM PDT.
Well, it may be time to nationalize the banks.
If you nationalize anything else, the banks try to take it over or kill it. This has even happened with an education at a land-grant college, which should be low-cost or free, but now makes most students take out a student loan.
You might remember the effort by the banks to make Kuchinich sell the Cleveland public power system to a private company. A similar effort to force the sale of the Bonneville Power Administration has been going on in a low-key way for years.
So maybe the time has come to bite the bullet and draw the fangs of the bankers.
PS, the only way the "nationalization" of the financial sector would bother me (other then being POed as a taxpayer that it happened in the first place) is if after things stablized themselves that real meaningful reform intended to keep it from happening again was not passed with the government then selling of what it ownes at an appropriate pace to maximize returns.
This is pretty close to what I've been proposing. Although like any white knight, I'd want a seat on the board too.
I, too, would want a seat on the board. This and related issues are why I think the government ought to have voting shares. Sorry, fat cats, beggars can't be choosers.
But before we invest, said banks need to take the write down on their bad debt, so we don't overpay for our stake.
Well, again, one reason that an equity purchase makes sense is that there's a market made up of millions of cynical, skeptical investors who determine price. The presence of such a market should go a long way toward insuring against the possibility that taxpayers will overpay. In worst case scenario, the government can offer a price for equity below the market if it fears that a particular bank's shares are overvalued. But I'm guessing the market in most cases is already assuming that most mortgage paper is only worth a small fraction of its face value. And in any event, relying on a non-perfect market for pricing information strikes me as a far safer course of action than relying on a magic number dreamed up by Hank Paulson while on an LSD trip. And for further insurance against overpaying, we should also re-introduce short selling of financial institution stocks.
The only purpose for bank nationalization would be to restore their capital and bring them back to health as quickly as possible so that they can be reprivatized, hopefully for a profit for the taxpayer.
The government should not use its ownership position to realign the banks' operations to support any other goals. I think this must be stressed.
Am I too queasy about taking over banks? (That's a serious question. Am I?)
Yes. Look, the banks are protected by the FDIC, the Treasury and the Federal Reserve, and now Paulson wants to give them 700 billion dollars.
What's the fucking difference?
What I find bizarre is that people who weren't opposed to all kind of bailouts (like LTCM) and lots and lots of loose credit to help the financial system are both complaining about free markets being failures AND too queasy to nationalize the damn banks. It makes no damn sense.
One more time: for the amount of money we're going to spend, we could nationalize the banks (by buying up all the stock! Or buying new stock! Whoo!). And further (see Yves Smith) the actual bailout cost doing it the way we're doing it is probably going to run 5 trillion dollars.
So why not just cut out the middle man and go straight to the source?
max
['And what Jasper said, I think.']
http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html?em
Partially buying out the failing banks (with stock purchases) is the way to go. See this NY Times article. This is apparently what they did in Sweden and it worked out pretty well for them. The problem with Dodd/Frank is that is doesn't take enough equity in the failing banks. Still too much of a giveaway.
If you read the article, you will also see that mark-to-market is a critical part of making this work.
Also, if you buy out banks, the ones who don't want to participate can try to raise private capital on their own. We just saw this happen with Buffet and Goldman-Sachs. This way you are only putting money into the banks that are actually failing and can't get private equity. If they start to make money again, then you sell the stock and the government gets is money back.
The problem with Dodd/Frank is that is doesn't take enough equity in the failing banks. Still too much of a giveaway.
Does anybody have a number on this yet? I have feared that the Democrats will be too weak when it comes to the equity issue, but I haven't seen any particulars. I thought I read somewhere that the the legislation would require any purchase of distressed assets to be accompanied by equity warrants of equal value. Although needlessly complicated in my view, I don't think it's necessarily an unacceptable approach -- provided the equity is priced appropriately. But again, I haven't seen how they propose to determine price. As I noted above, there exists this relatively efficient, price minimizing engine known as the stockmarket, and it would seem to me making use of its efficiency is the way you want to go when making an offer for equity...
I prefer this to the "buy shitty securities/get warrants" version. Mainly because the BSS version is going to be run by the worst administration in history. They've given us no reason to trust us, so believing that they will in fact extract the proper amount of equity in return for the crap is extremely doubtful, even if the Dodd version makes it.
And I doubt it will, because I expect the Democrats to crumble as they always do and accept whatever wingnut amendments the House Repubs want while sacrificing anything progressive about the bill (they are already giving away the bankruptcy judge thing.)
Submitted by justinslot (not verified) on Fri Sep. 26, 2008 1:42 PM PDT.
Has anyone actually seen the Dodd-Frank plan, specifically how the assets will be priced? Whatever they were proposing seems to have gotten lost when the Republicans had their tantrum.
Also, if you buy out banks, the ones who don't want to participate can try to raise private capital on their own. We just saw this happen with Buffet and Goldman-Sachs.
Excellent point. And JP Morgan just raised ten freakin billion. One of the innumerable weaknesses of the Paulson approach is that it seemingly places all the burden of financial institution recapitalization on taxpayers, while utterly eschewing the possibility that, you know, actual private investors, too, might be willing to pony up some cash.
Never thought I'd say this, but thank God for the existence of conservative wingnuts in the House.
Jasper: there exists this relatively efficient, price minimizing engine known as the stockmarket
Such a capitalist! How would you take care of the poor billionaires?
Never thought I'd say this, but thank God for the existence of conservative wingnuts in the House.
The true conservatives have never been the big problem. I may not usually agree with them, but they do have their points.
It's the crony capitalists like Bush, Cheney, Graham, et al, that I despise. I may not want to live in Libertopia, but it'd sure beat a banana republic.
Cynthia McKinney
A Gift for a Generation: A U.S. Financial System of Our Own
September 25, 2008
Last week, I posted ten points (that were by no means exhaustive) for Congressional action immediately in the wake of the financial crisis now gripping our country. At that time, the Democratic leadership of Congress was prepared to adjourn the current legislative Session to campaign, without taking any action at all to put policies in place that protect U.S. taxpayers and the global community that has accepted U.S. financial leadership. Those ten points, to be taken in conjunction with the Power to the People Committee's platform available on the campaign website at (http://votetruth08.com/index.php/resources/campaignplatform ), are as follows:
1. Enactment of a foreclosure moratorium now before the next phase of ARM interest rate increases take effect;
2. elimination of all ARM mortgages and their renegotiation into 30- or 40-year loans;
3. establishment of new mortgage lending practices to end predatory and discriminatory practices;
4. establishment of criteria and construction goals for affordable housing;
5. redefinition of credit and regulation of the credit industry so that discriminatory practices are completely eliminated;
6. full funding for initiatives that eliminate racial and ethnic disparities in home ownership;
7. recognition of shelter as a right according to the United Nations Declaration of Human Rights to which the U.S. is a signatory so that no one sleeps on U.S. streets;
8. full funding of a fund designed to cushion the job loss and provide for retraining of those at the bottom of the income scale as the economy transitions;
9. close all tax loopholes and repeal of the Bush tax cuts for the top 1% of income earners; and
10. fairly tax corporations, denying federal subsidies to those who relocate jobs overseas repeal NAFTA.
In addition to these ten points, I now add four more:
11. Appointment of former Comptroller General David Walker to fully audit all recipients of taxpayer cash infusions, including JP Morgan, Bear Stearns, Fannie Mae, Freddie Mac, and AIG, and to monitor their trading activities into the future;
12. elimination of all derivatives trading;
13. nationalization of the Federal Reserve and the establishment of a federally-owned, public banking system that makes credit available for small businesses, homeowners, manufacturing operations, renewable energy and infrastructure investments; and
14. criminal prosecution of any activities that violated the law, including conflicts of interest that led to the current crisis.
Ellen Brown, author of "The Web of Debt" writes at http://www.webofdebt.com/articles/, "Such a public bank today could solve not only the housing crisis but a number of other pressing problems, including the infrastructure crisis and the energy crisis. Once bankrupt businesses have been restored to solvency, the usual practice is to return them to private hands; but a better plan for Fannie and Freddie might be to simply keep them as public institutions."
Too many times politicians have told us to support the "free market." The unfolding news informs us in a most costly manner that free markets don't work. This is a financial system of their making. It's now past time for the people to have an economic system of their own. A reading of the full text on the Congressional "Agreement on Principles" for the proposed $700 billion bailout reveals the sham that this so-called agreement truly is. Today our country faces an economic 9/11. The problem that is unfolding is truly systemic and no stop-gap measures that maintain the current bankrupt structure will be sufficient to resolve this crisis of the U.S. economic engine.
Today is my son's birthday. What a gift to the young people of this country if we were to present to them a clean break from the policies that produced this economic disaster, the "financial tsunami" that former Comptroller General David Walker warned us of so many months ago and instead offered them a U.S. economic superstructure that truly was their own.
Power to the People!
I only have two questions:
Is it the best plan, and will it solve our problems ?
If the answer is yes and yes, then who gives a shit how any of us "feel" about it. This isn't the time for ideology. If this is the best solution for the US taxpayers, us, then we should do it. Hell, Fannie Mae did fine as a government institution for 30 years.
I'm a layman, but as the family financial mgr I've been trying to pay attention. Let's keep it simple:
The feds offer any bank up to half their current market capitalization in return for:
1-Nonvoting senior preferred shares priced at a discount from current common shares equal to the percentage of market cap required. Govt must sell them within, say, ten years, whereupon they convert to common.
2-the same percentage of seats on the board to be staffed with senior retirees from FDIC
3-Cooperation with a forensic accounting of their mortgage and securities operations for the last five years.
It's distasteful, but fair. Make them the offer and see how badly they really want the money. FDIC shakes them out, we sell the preferred in the survivors when things stabilize to cover at least some our losses, and with any luck we find the beginnings of the fraud and extract a dose of justice to boot.
OR_
Offer Warren Buffett 20% of the net and ask him to fix it.
Either way, we can sell it to the House Republicans as a very capitalist thing to do, with a real chance to turn a profit, and it's simple enough for even GW to explain.
Diagnostic parsimony of a Leveraged Market.
A leveraged market is not free. It is a
debt market. It is a slave market. Proof
is the statement "One who borrows what isn't
his'n must pay it back or go to prisn."
I believe the first three sentences are the
Occam's Razor of the cause of the
current crisis.
I don't see anything in world history or
long term economic history to disprove this.
Of course one may argue that an economic
slave market is a good and/or necessary
state. In my opinion this argument has
always necessitated a state of war untill
settled. And then the cycle starts again,
because resentment inhabits the laws of
desire more intimately than the worm does
the apple.
"The feds offer any bank up to half their current market capitalization in return for:
1-Nonvoting senior preferred shares priced at a discount from current common shares equal to the percentage of market cap required. Govt must sell them within, say, ten years, whereupon they convert to common.
2-the same percentage of seats on the board to be staffed with senior retirees from FDIC
3-Cooperation with a forensic accounting of their mortgage and securities operations for the last five years."
And then what? I'd rather see voting shares (#1), Lee Iacocca as overall chairman of the boards (#2) and not just cooperation with the forensic accounting, but executive financial accountability for the fraud that will undoubtedly be uncovered (#3).
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