Thursday, September 25, 2008

Bailout musings

Conservatives are highly conflicted on the bailout. In theory, it shouldn't happen. Insolvent firms should be allowed to fail and the underlying assets sorted out in bankruptcy. The problem, of course, is that the intervening period could see an evaporation of the credit market and, at best, a serious recession. It's an election year. That won't be allowed to happen.

So what kind of bailout should there be? There are three things to avoid. First, there is no need to make troubled firms whole. The government should buy enough of this bad paper to get the credit markets moving again but not a penny more. In other words, it should alleviate as little of the economic pain felt by shareholders as possible. Second, the government should not acquire any more private firms. It has no business running them. What it should do is buy these securities at a deep discount and insist on the lion's share of whatever profit they generate - which could be substantial. Third, the bailout should not be the occasion to address issues other than the distressed financial markets. We shouldn't alter the terms of mortgages or put a moratorium on foreclosures or attempt to restrict executive pay - at least not with respect to firms that are buying rather than selling. All of this gets in the way of maximizing the government's potential recovery and minimizing - or even eliminating - the cost to the taxpayers. If the government wants to aid distressed subprime borrowers, it ought to do that separately and, if it is done, it ought to be by way of straight subsidy so that the cost is clearly stated.

9 comments:

gnarlytrombone said...

"First, with Goldman Sachs and Morgan Stanley now operating as low-leverage bank holding companies, a dollar injected into the economy will most likely turn into $10 in capital (instead of $30 when they were investment banks). This is a huge change"

Brilliant. No wonder the dude's a "former hedge fund manager." It was an injustice to hoard his genius from the masses.

Anonymous said...

You wrote: "We shouldn't ... attempt to restrict executive pay - at least not with respect to firms that are buying rather than selling. ... this gets in the way of maximizing the government's potential recovery and minimizing - or even eliminating - the cost to the taxpayers."

Excessive compensation to executives is a financial drain on a struggling company; reasonable limits are an element of fiduciary responsibility. And since, in the recent past, these executives justified their very, very generous compensation packages because of the "value" they bring, and now that "value" has turned out to be a mirage, it would be imprudent and inequitable to not limit their compensation. In no way would these limits get in the way of maximizing the government's potential recovery and minimizing - or even eliminating - the cost to the taxpayers.

sean s.

gnarlytrombone said...

Wow. This all took a while to sink in, but then hit me like a shot of Aguardiente. I feel giddy.

Just to be clear. The plan is take the worst securities off Wall Street's hands for 25 cents on the dollar. The remaining 3/4 of debt... we'll get back to you on that.

Anyway, Wall Street stabilized. Oh, wait. Yeah, we'll cross that bridge...

Ok, so. The foreclosures, waiting to be spun into gold. We'll assume the pile has stopped becoming higher. Because. Yes.

Now a bit of stimulus. Yes. What's that again? The Street recapitalization. Right. Let's get to that first. $500 big ones. No problem.

Ok. Back to injecting stimulus. What's that you say? $85 plus $200 plus $700 plus $500... WHAT? $150? What the...

Alrighty, then. Where were we? Ah, yes. "The Cheat."

"Jiabao! How ya doin'? What's that? Really? Oh. Ok." Um, let's put The Cheat aside. For now.

Citizens! How ya fixed for housing!!?? What?

Dad29 said...

That was clarification, Gnarly.

What do you do for OBfuscation?

gnarlytrombone said...

Ok, I'm sobered up and ready to take another crack at this beast.

Focusing on that first obstacle, how we're going to price this stuff. Peter, you had something to say?

Ironically, the intervention could even trigger additional failures of large institutions, because some institutions may be carrying troubled assets on their books at inflated values. Establishing clearer prices might reveal those institutions to be insolvent.

Hmmm. Good point. So. Perhaps we should rethink the garage sale idea?

Congress must pass some sort of relief, if only because Wall Street is expecting it. If we do nothing, there is a significant risk of another collapse of confidence in the financial markets

But you just said... If we... What you're saying, then, is that if we do this, confidence is going to collapse. If we don't...confidence is going to collapse.

Yes.

Alright. Do we have any other alternatives?

Yes, we do.

Word.

gnarlytrombone said...

Shaddup you sarcastic elitist tweeds! That's right, we're trying to fix the whole gaddam economy, and a pathetic passel of postmodernists are making neo-Marxist jokes! Who funded this trash?

Cultural leaders have come together to announce a massive poetry buyout: leveraged and unsecured poems, poetry derivatives, delinquent poems, and subprime poems will be removed from circulation in the biggest poetry bailout since the Victorian era. We believe the plan is a comprehensive approach to relieving the stresses on our literary institutions and markets.

Let there be no mistake: the fundamentals of our poetry are sound. The problem is not poetry but poems. The crisis has been precipitated by the escalation of poetry debt—poems that circulate in the market at an economic loss due to their difficulty, incompetence, or irrelevance.

Brukewilliams said...

So what kind of bailout should there be? There are three things to avoid. First, there is no need to make troubled firms whole. The government should buy enough of this bad paper to get the credit markets moving again but not a penny more. In other words, it should alleviate as little of the economic pain felt by shareholders as possible. Second, the government should not acquire any more private firms.
=================
Brukewilliams
Viral Marketing

Dad29 said...

Bruke, look at Ryan's plan.

No cash-purchases. Instead, Treasury insures banks against loan-failure (at a price.)

But that re-flates the value of the GSE bonds, MBSs, and CDOs, providing liquidity to banks.

And the insurance premiums will slap moron managers hard, meaning their shareholders will likely send them to pasture.

Anonymous said...

The text of the "agreement": http://money.cnn.com/2008/09/28/news/pdf/index.htm. A 106 page .pdf.

sean s.