The New Paulson Plan
| Mon Oct. 13, 2008 9:59 PM PDT
THE NEW PAULSON PLAN....Yesterday I had a couple of questions about the Treasury's plan to recapitalize America's banks. One question was, which banks would get help? Big ones? Little ones? The answer, it turns out, is all of them:
One central plank of these new efforts is a plan for the Treasury to take approximately $250 billion in equity stakes in potentially thousands of banks, according to people familiar with the matter....Treasury will buy $25 billion in preferred stock in Bank of America, J.P Morgan and Citigroup; between $20 billion and $25 billion in Wells Fargo; $10 billion in Goldman and Morgan Stanley; and between $2 billion and $3 billion in Bank of New York Mellon and State Street.
Second question: did the banks themselves pressure Paulson into doing this? Apparently not:
Not all of the banks involved are happy with the move, but agreed under pressure from the government.
The justification for forcing all the big banks to participate is that if only a few banks got help, then they'd be instantly stigmatized as failures and no one would do business with them. So it's better to force everyone to recapitalize, thus keeping everyone's relative solvency a secret.
I get the reasoning, but I wonder if it really makes sense? After all, isn't part of the point of this exercise to figure out which banks are really worth saving and which ones aren't? And should we really be wasting money on banks that don't need help? As part of the plan the Fed is also guaranteeing new debt, and it seems as if that, combined with sufficiently large capital injections, would make the rescued banks pretty sound. Plus there's this:
While the Treasury wants to put money into banks, its main goal is to attract private capital. To make sure private investors aren't scared away, the Treasury is expected to structure its investment on terms favorable to the banks and will inject capital in exchange for preferred shares or warrants, these people said, a move that is designed to not hurt existing shareholders.
If they're forcing good banks to take government cash, this is actually reasonable. And if we do it for some banks, I guess we have to do it for all of them. But that means we're also in the business of rescuing shareholders of bad banks. Why?
I dunno. I guess I'll wait for the experts to weigh in and set me straight. The whole thing sounds a little squirrelly, though. I can't help but think that aiming the money more tightly at bad banks and driving harder bargains in the process would have been a better idea.
UPDATE: Brad DeLong is thrilled with the plan. Hilzoy has some concerns.
Advertisement
Advertisement
Comments
I get the reasoning, but I wonder if it really makes sense? After all, isn't part of the point of this exercise to figure out which banks are really worth saving and which ones aren't? And should we really be wasting money on banks that don't need help?
Silly Kevin, you sound like a capitalist kulak wrecker.
We are all Communists now. Comrade Paulson's 5 Year Plan will fix everything. The Politburo knows all.
Submitted by Gene Ha (not verified) on Tue Oct. 14, 2008 5:16 AM PDT.
I like the fact that this whole plan is easily reversed.
The US Gov can sell its shares at any time. The banks are encouraged to buy back the shares in 2009. If the bank really doesn't need the money, it could just hand back the billions and buyback all the shares. Best of all for the taxpayers, proving that the bank is healthy will improve their stock prices so we'll make a profit.
It's a harmless plan, but according to the WSJ article also backed by most economists. So hopefully an effective plan.
Since we are getting equity for our money, mistakingly helping a healthy bank should net us a profit. Our loses will come from mistakingly helping a bank which is doomed to fail even with the injection. That is where our money will be lost. Of course the greatest effect on the economy will be in helping those banks whicht are marginal, but can become healthy with the injection.
I don't mind injecting capital into all major banks for the reasons given above, there simply isn't enough time to figure out who is healthy and who is not.
But I'm still concerned that the plan apparently does little to punish exisiting shareholders or management. By injecting funds into everyone, it is harder to punish since some players were better managed than others. Maybe if the preferred shares are not repurchased after a certain time limit, they should be converted into common stock, wiping out exisiting shareholders.
Certainly dividend payments should be suspended on all insitutitons receiving public funds.
I don't think there is any requirement to write down bad assets as well, so how can we know who is healthy? Writing down the bad assets while maintaining ample capital is key to resolving this mess. I'm not sure the new plan does that.
Direct injections of capital make a lot more sense than buying toxic assets and trying to re-sell them. Much more efficient and far less administrative costs.
That said, this is socialism, pure and simple folks. Government control of the means of production is the essence of a socialistic system. At least this likely innoculates liberals against being called socialists by the Republicans who supported this approach, for several generations to come...
I was curious what the first effects of the Govt's purchase of a share of the major banks was going to be. I'm sure Nobel Paul would approve. When I went to my ATM this morning to get cash, the first thing I noticed was an American Flag displayed on the "Insert Card" screen. I then withdrew $20, but only $19 came out. When I examined my receipt, in small print at the bottom was the message. "Thank you for your $1 contribution to Acorn". Just think how efficiently we can now redistribute wealth!
One question was, which banks would get help? Big ones? Little ones? The answer, it turns out, is all of them:
My strong impression is that "all of them" means the big nine plus stragglers. The arm-twisting was applied to those nine, none of which were going to be allowed to fail in any case.
Putting equity into a small, broke bank makes no sense and I bet we don't do it.
That's hilarious. You know for as long as I can remember, everytime I take $20 from the ATM, my bank withdraws $22 and gives $2 to senior management?
We've always been redistributing wealth through the banking system. At least now my money is being moved in a direction in which I might see a little benefit.
TCD, FWIW, from Syracuse.com:
"In 1988, Ron Ehrenreich, of Syracuse, ran for U.S. vice president on behalf of the national Socialist Party. ... 'Well, this is certainly not socialism. I think what is going on is basically a plundering of the public purse to reward greedy and irresponsible financial activities. ...'"
Hmm, my bank is not on that list. That's actually awesome because most reports say that US Bancorp is actually rather solid, relatively speaking.
And that means that even in the crazy bubble they kept their heads better than most.
I'll stick with 'em.
Um. Bank regulation is supposed to be different (notice, bank... bank not investment company). Regular bank leverage and regular loan making is supposedly one of the most regulated and audited services on the planet. Regular bankers are naturally conservative.
OK, so the Masters of the Universe probably had some effect, but the regular banking business (taking deposits and loaning them out for an interest rate profit spread) should be fine - especially at smaller banks.
It's the Go Go super-duper no can lose non-traditional banking activities that could swamp regular banks. It wasn't making mortgage loans that was the problem - it was making bad ones that you sold off with no responsibility and all the origination fee profit.
Singling out banks would start a cascade of failures.
In a rational world where emotion and panic were not a component of the market (i.e. a non-human alien world), there would be some spectacular failures and lots of people would lose some money. However, in the real world, the few spectacular failures would stampede lots and lots of otherwise serious-but-tolerable loss scenarios into bankruptcy as well. Thus, everyone has to take a bite of the recovery apple so that they are all tainted by the original sin of government intervention.
The stock injection plan is the right way to proceed. Although there will be various potshots and discounting of the approach - at the end of the day - the plan significantly increases the capital base of some of the largest lenders - and although not a quick fix ultimately the increased equity is beneficial to all parties. The FDIC inter-bank insurance is truly a benefit and although again not a quick fix - it will be seen as a solid foundation building action. Check out http://www.StockInjectionPlan.org. There's a lot of great information easily displayed and current.
replica watches
Submitted by Anonymous (not verified) on Mon Nov. 23, 2009 6:18 PM PST.
replica watches Discount Watches, Fashion Watches, Wristwatch, Fake Watch, Wholesale Watches, Jewelry Watches, Replica Jewelry Watches. Replica Michele Watch began with the Glashutte Watches Replica Belgian watchmaker Maurice Replica Ebel Watch Barouh Fake Corum Watches in the 1940s, Cartier Replica Panerai Ladies Watches Oris Watch Blancpain Watch Replica and his attention Replica Jaeger LeCoultre Watches to detail, Replica Bulgari craftsmanship, quality Franck Muller Replica Watches and Baume & Mercier Wristwatch unique styling. Michele Watches Replica Replica replica watches replica watches Fake IWC Watches Michele Replica Breguet Watch Watches are fashionable A Lange & Sohne Watch timepieces designed to Piaget Watch Swiss Army Replica Watch suit the Replica Breitling Watches customer s Rolex Fake Watches particular attitude and Replica Ulysse Nardin individuality. The internationally Replica Movado Seiko Wristwatch designed watches Replica Christian Dior Watches Fake Chanel provide outstanding quality Girard Perregaux Watch and Audemars Piguet Watches Replica value. Replica Invicta Watches Whether you are looking for the classy Roger Dubuis Watches Richard Mille Replica Replica Louis Vuitton and Rado Replica Watch elegant Fake Vacheron Constantin Watches Replica Chopard Watch watch Replica Patek Philippe Watches Tissot Wristwatch to wear Replica Swiss to Bedat & CO Replica work or a casual Porsche Design Watches Replica and sporty Replica Parmigiani Watch watch TAG Heuer Replica Watches to wear Mont Blanc Fake Watches around Maurice Lacroix Replica Watches Longines Mens Watches Jacob & Co. Watches town, Fake Michele Watches have what you are looking for.
Post new comment
MoJo Comments: Send Us Your Feedback
We changed our spam software to better filter comments. Should you encounter any issues, please let us know.
