Tuesday, November 11, 2008

"Warren Buffett seemed to get a much better deal on his Goldman Sachs capital injection than the Treasury Department did"

Justin Fox argues the following:

"It's already been noted that . It turns out the United Steelworkers union has been kind enough to actually run the numbers on the two deals, using the Black-Scholes option pricing model to value them (steel workers are totally into Black-Scholes; aluminum workers prefer the binomial model). Here's the bottom line, from an analysis the USW sent to Hank Paulson:

usw-analysis

I do think Buffett could demand a premium in this case because his investment was seen as an endorsement (albeit it perhaps a premature one) of Goldman Sachs in particular, while Treasury has been offering similar deals to every bank and its brother. And Treasury's goal is to save the banking system while protecting taxpayers, while Buffett's is to maximize returns for Berkshire Hathaway shareholders. So there should be a gap between the two valuations. I'm not sure it needed to be quite that big, though."

Here's my comment:

donthelibertariandemocrat Says:
  1. Justin, I disagree with you. I believe that there is a higher standard for investment returns when the taxpayer's money is spent. As Bagehot believed, the terms of any bailout should be onerous, both in order to deter future bailouts, but also to reward the public for it's largess. There is no such thing as saving a system. There are certain banks that can be saved or not. As such, one has to deal with each bank as a separate entity, and place terms on it that are at least as good as a private investor should get, otherwise they could give the terms to a private investor. In some cases, this simply means giving the government more equity than a private investor would get. Other solutions might also work.

    Reification leads to believing that a system needs to be saved, and that leads to an easing of concrete conditions that should be imposed on actual individual entities. A concrete example is when an individual on a team breaks a rule, and is let off easier than an individual because it would hurt the team. If you let the player continue playing, you should make the punishment harsher in other ways. Otherwise, you're just allowing behavior that will continue forever.

    I'm not sure I believe this, but, I think I do.

Here's his reply:

"Justin Fox
Says:
  1. I think we've moved past the government being lender of last resort to something much more involved and complicated. Because Bagehot only meant for the lender-of-last-resort function to apply in a liquidity crunch, not when institutions may be insolvent.

    That doesn't mean you're wrong that the government should get more equity than it's been taking, though."

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