"Saturday, October 4, 2008
Problems With The Bailout
From the NY Times article "For Treasury Dept., Now Comes Hard Part of Bailout", I see the following problems with the plan as envisaged:1) Possible conflicts of interest with the administrators of the plan.
2) Overpaying for assets.
3) Doesn't do enough to ease credit markets or makes it worse.
4) When the assets are eventually sold, there is a huge and unanticipated loss.
5) Lobbying by hedge funds, etc.
Are there others? "
Look familiar? How about this:
"Sunday, October 5, 2008
TARP Troubles
1) Possible conflicts of interest with the administrators of the plan:
"Still, some investors are troubled by the government’s heavy reliance on private firms. They said it would be difficult to prevent firms from steering capital in ways that favor their private customers.
Inevitably, large asset management firms own, or are tied to banks that own, some of the same securities the government is seeking to sell. Pimco, for example, is owned by Allianz, one of Germany’s largest insurance companies. Merrill Lynch owns a stake in BlackRock.
“I can’t even fathom how I would manage that,” Mr. Siegel said. “How would I manage one side, where I’m seeking to maximize profit, and the other side, where I’m looking out for the social good?”
The law stipulates that the government must prevent conflicts of interest in the hiring of firms, the decision of which assets to buy, the management of those assets and even the jobs held by employees after they leave the program. But it leaves the details to the Treasury."
2) Overpaying for assets."Other than helping attract private capital by cleaning up the institutions' balance sheets, I'm not sure how this plan helps the financial system recapitalize. Hopefully Mr. Paulson doesn't intend to pay a premium, not just to the current market value, but to current book value, for the toxic assets. But how else could the plan help the financial system recapitalize? "
And:
"The bailout is not a way of preventing the loss of value. The loss (or transfer) of value occurred when people made bad mortgage loans. What happened more recently was the recognition of that loss. All the bailout can do is to shift the loss from some people to others, from the stockholders and creditors of firms that are now effectively bankrupt to the taxpayers."
And:
"And as with the MLEC, the big issue will be how to price the paper or at least some commentators treat that as an open question. But by foisting this on to
3) Doesn't do enough to ease credit markets or makes it worse.
"The problem was that there was no price which would solve the basic conundrum: investors were not willing to pay above market prices, and the banks were unwilling to sell at market. Paulson & Co. wasted nearly two months trying to breathe life into this stillborn idea, then abandoned the effort."
And:
"Hopefully Mr. Paulson’s fiscal moves will provide enough fiscal laxative to unplug the banking sector and get money flowing again. Only time will tell if he’s done enough or if more will be required from the next Treasury secretary."
And:
"But the MLEC was designed to address the pressing problems of a year ago. The crisis has advanced considerably since then.
Remaining fixated on a solution that is badly out of date is tantamount to fortifying the Maginot Line when the blitzkrieg has rolled into the fields of France and the British are beating a retreat to Dunkirk. And I expect it will prove every bit as effective. "
And:
"Long after the crisis burst into the open, the Fed and Treasury downplayed it. It was, they insisted, "contained." Last week they asserted that, unless the House voted "yea," the wheels would come off this $14 trillion economy. President Bush himself has broadly hinted that the nation is on the cusp of disaster.
How can they be so sure? And how can they know that the unintended consequences of the radical policies they are pushing through won't be worse than the panic that they themselves are helping to foment? When the Fed insists it has no choice but to print up hundreds of billions of new dollars and when the keepers of accounting standards bend in the face of criticism that market prices hurt, what they are really saying is the that financial truth is too awful to bear. Heaven help us all if they're right."
4) When the assets are eventually sold, there is a huge and unanticipated loss.
"Today, the suits are saying that mortgage-backed securities are undervalued, and that if the government just holds them to maturity it will make a profit. But the geeks will tell you that we cannot be certain these securities are undervalued.
The valuation of mortgage-backed securities is marked by an enormous asymmetry. If house prices rise, the security holder gains little. He or she is happy to be relieved of the risk of default, but he or she cannot share in the homebuyer’s profit. On the other hand, each drop in house prices lowers the value of the security further.
Saying you will be just fine if you hold a mortgage-backed security to maturity is like saying you will be just fine if you don’t evacuate when Hurricane Ike is approaching. Depending on where it makes landfall, that strategy may cost you nothing—or you could be Galveston.
In terms of the bailout, a Galveston-like scenario would be a decline in the housing market that turns out to be steeper or more protracted than what financial markets currently expect. If such a hurricane makes landfall, almost the entire $700 billion could go down the drain. Under better scenarios, a small profit could materialize.
Main Street might prefer to have a choice about whether to take that risk. Instead, the choice is being made by politicians, who are gambling with other people’s money to advance their own agendas.
This bailout isn’t as bad as Main Street thinks. It’s worse."5) Lobbying by hedge funds, etc.
"But hedge fund managers and other potential buyers are demanding that the government push for the much lower price, based on the current trading value of the assets. These potential buyers are hoping they can piggyback onto the Treasury program, perhaps even acquiring distressed assets alongside the Treasury in auctions."
6) Reverse auctions:
"The main mechanism for buying these assets will be reverse auctions, using the same principles that govern auctions of electricity or the wireless spectrum. In this case, the government will issue an offer to buy a class of assets — for example, subprime mortgage-backed securities — with the final price being determined by how many banks are willing to sell."
And:
"Here is the link. The article will soon be much longer. Here is a website devoted to summarizing the research against reverse auctions; it appears unrelated to critiques of Paulson and the Paulson plan. It seems to be fighting a personal war and so I doubt its objectivity:
As near as I can tell, every negative comment about PPIP is a version of these points. Now, these points are not just possible, but really built into the plan, because it's a hyrid plan. All that PPIP, or any hybrid plan can do, is minimize or ease them. They are inherent problems.
The answer that I gave was this:
"Tuesday, September 23, 2008
We're Becoming Sweden
"A banking system in crisis after the collapse of a housing bubble. An economy hemorrhaging jobs. A market-oriented government struggling to stem the panic. Sound familiar?
It does to Sweden. The country was so far in the hole in 1992 — after years of imprudent regulation, short-sighted economic policy and the end of its property boom — that its banking system was, for all practical purposes, insolvent.
But Sweden took a different course than the one now being proposed by the United States Treasury. And Swedish officials say there are lessons from their own nightmare that Washington may be missing.
Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.
That strategy held banks responsible and turned the government into an owner. "This seems to be the plan here as well, at least for the Democrats.
As Paul Krugman says:
"What possible justification can there be for doing this without acquiring an equity stake?
No equity stake, no deal."
Sounds Swedish to me.
By the way, if we have to do this, we should get something.
And this:
"Thursday, October 2, 2008
How I've Approached The Plans Being Put Forward
In any case, I accept that there is a difference between politics and political theory. Politics is the art of the possible. Political Theory is the view of the government that you would ideally like to see.
In the current crisis, I acknowledged two plans as having some merit, and fulfilling my requirement that any plan be clear and understandable:
1) A totally free market plan.
2) A version of the Swedish Plan.
In my mind, there are three points that are informing my views on which plan to favor:
A) There will be a government intervention of some sort, undoubtedly large.
B) Because crises such as these bring about government intervention.
C) If there is government intervention, it should be for as broad a purpose as possible and be as thrifty with the taxpayers money as possible.
Based on these assumptions, I favor a version of the Swedish Plan.
It's not that I don't see other plans as possibly working, but hybrid/compromise plans are generally:
1) Easier to manipulate by special interests.
2) Harder to determine what worked and what didn't.
3) Riskier financially.
That's how I've approached this crisis.
1) Foreign investors and governments will want us to honor their bonds.
2) We will get involved in foreign disputes, for example, Banamex.
3) We could still lose a lot of money.
It would be better, but not cost free, if we could do it.
Now, going forward, we will want the FDIC is to be able to handle problems like this. That's why I can't understand the criticism of the FDIC being involved in the PPIP. Shouldn't they be? After all, this turned out to be wrong: from Oct 9th, 2008:
http://www.nytimes.com/2008/10/10/business/worldbusiness/10global.html?pagewanted=2&hp
"The direct injections of cash would be for comparatively healthy banks. If a bank is failing and needs to be rescued or shut down, the Federal Deposit Insurance Corporation would handle it through its own procedures."
Finally, big banks:
"Saturday, October 4, 2008
Not Really Free Market After All
"Treasury Secretary Henry Paulson’s plan, which is now law, is fiscal stimulus that will be injected directly into the banking system to supplement almost nonexistent private-sector lending with government cash and determination. Mr. Paulson may be shooting the right weapon at the right time because it will help rescue the banks while restarting corporate and consumer lending.
But Mr. Paulson’s fiscal-stimulus work didn’t end with the bailout bill.
With hardly anyone noticing, on Wednesday he pushed through very technical and obscure changes to tax regulations that provide a “tax subsidy” for acquirers of troubled banks. Just as automakers stimulate car sales through rebate checks, the Treasury is providing a form of tax rebate to acquirers of troubled banks. Everyone can thank Hank Paulson and his stealth tax-driven fiscal stimulus for the astonishing news that Wachovia was being acquired by Wells Fargo and not Citigroup. It was Mr. Paulson’s tax subsidy to Wells Fargo that provided the fiscal grease to make this deal happen. Pundits who point to the deal and proclaim that the “free markets work without government help” don’t understand the motivating effect of several billion dollars of tax benefits to Wells Fargo."
Your government's dollars at work.
And this:
"Sunday, October 12, 2008
We Could Certainly Use More Banks
Do you remember way back in 2005 when Walmart tried to enter the banking industry? They ran into one little problem: the Washington buzz-saw operated by banking industry incumbents to create barriers to entry. You do not have to believe my version of the story: just read it at Business Week or MSN.com, among other places.
He suggest that Walmart would have made a possible difference in this crisis, which seems wrong to me because of the assumptions that I believe this crisis has unfolded under. However, here's my comment:
As near as I could tell, the whole point of these tax cuts was to encourage mergers and higher profits for the fewer banks, if for no other reason that it might make it easier to pay us back. I can't even remember anybody really commenting on this plan at the time. Why not? Obviously, I'm not for it as anything but a move in a crisis.
To prove that there's nothing new under the sun, here's a post from October when AIG bonuses were a problem:
Back in October, I did a post about this, just as food for thought:
Wednesday, October 29, 2008
I Don't Work In AIG Crap
I want to do a little thought experiment, just as food for thought. Let me begin by saying that:
1) I'm no fan of AIG
2) I don't support TARP
3) I don't support outrageous salaries
Just follow me:
AIG, just for fun, has two parts of its business:
1) AIG insurance
2) AIG crap
AIG insurance makes money and is still solvent, while AIG crap has forced us into, well, you get it.
Now, I, Don, work for AIG insurance, and the boss comes to me and says, "Don, you've done a fine job making us money, but Joe Horse's Arse over in crap has made a pig's breakfast of things, so you're going to have to take a hit for the team".
Now, I, Don, can:
A. Take a hit for the team, because I enjoy my job, the team, etc.
or
B. Say that I've managed to make money for AIG through a financial maelstrom and I deserve a bonus, and if I don't get one, maybe another insurer would appreciate me more.
So, attacking AIG is fine about compensation, but you do have to look into the facts of that compensation
My point is that we keep reinventing the wheel over and over again in this crisis. By now, we should be dealing solely with practical politics. The theoretical issues are now a distraction.
Posts
Actually, your point might be important now, in that we would seem to be left with fewer banks. As well, we have to hope that the government will disinvest from the banks they invest in, and there might be a way to encourage more banking competition in that eventuality. I'm not competent to know. Don the libertarian Democrat