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koganbotToday's column from Paul Krugman: Cash For Trash
Krugman's ongoing blog
I'd summarize Krugman's argument as follows: (1) If we the gov't buy the bad assets at market value we're not going to get the financial firms out from under, (2) if we buy the assets at way more than market value we will be helping the firms by giving a windfall to the firms (and their stockholders and executives) at taxpayer expense, so (3) what we should be doing instead is give capital straightup to the firms - without buying bad assets and without having to guess the value of what we're getting - in return for part ownership of the firms, so that we can demand that some benefit of the bailout goes to the public.
In any event, Senator Chris Dodd, who chairs the Senate Banking Committee, is floating a counterproposal that I haven't looked at but at first glance seems to Krugman to be a step in the right direction. Here's a Bloomberg.com article on the Dodd proposal and here's a text of the proposal.
Says the article:
The legislation requires Treasury to take an equity stake equal to the purchase price of the assets being bought. If the company isn't publicly traded, the government would take senior debt instead, placing it in the front of the line of debt holders for repayment in the event of a bankruptcy.
Dodd's proposal also would create a five-member oversight board to supervise the Treasury secretary's purchase and sale of distressed mortgage debt.
Krugman's ongoing blog
I'd summarize Krugman's argument as follows: (1) If we the gov't buy the bad assets at market value we're not going to get the financial firms out from under, (2) if we buy the assets at way more than market value we will be helping the firms by giving a windfall to the firms (and their stockholders and executives) at taxpayer expense, so (3) what we should be doing instead is give capital straightup to the firms - without buying bad assets and without having to guess the value of what we're getting - in return for part ownership of the firms, so that we can demand that some benefit of the bailout goes to the public.
In any event, Senator Chris Dodd, who chairs the Senate Banking Committee, is floating a counterproposal that I haven't looked at but at first glance seems to Krugman to be a step in the right direction. Here's a Bloomberg.com article on the Dodd proposal and here's a text of the proposal.
Says the article:
The legislation requires Treasury to take an equity stake equal to the purchase price of the assets being bought. If the company isn't publicly traded, the government would take senior debt instead, placing it in the front of the line of debt holders for repayment in the event of a bankruptcy.
Dodd's proposal also would create a five-member oversight board to supervise the Treasury secretary's purchase and sale of distressed mortgage debt.
no subject
Date: 2008-09-22 09:24 pm (UTC)If the government pays as little for the banks' troubled assets as it should to protect taxpayers (i.e., the market rate), the banks will still be screwed. Why? Because they'll have to raise humongous amounts of new capital to offset the losses. Where is this capital going to come from? Paulson doesn't say.
Under the Paulson plan, the way this problem will likely be resolved is that the government will overpay for the assets--to "save the financial system." In the process, the government will also save two constituencies who deserve no protection whatsoever: bank shareholders and bondholders.
...
If/when a bank needs capital, the government should provide it--in exchange for a fair equity stake. Knowing there is an investor-of-last-resort should persuade bank clients to stick around. The taxpayers will then own significant chunks of the banks and will therefore benefit from their recovery. Meanwhile, the folks who are directly responsible for all the crap on the banks' balance sheets--the banks--will still be responsible for sorting it all out. And their shareholders--not taxpayers--would take it on the chin
Good ole internet
Date: 2008-09-22 10:23 pm (UTC)Yeah ok henry, so you as a Merryl analyst at your peak are smarter than the former Goldman CEO and current Treasurer. Sure.
Not to mention he is Jewish, who are infinitely smarter than everyone else in matters of finance.
I think you need to take a step back bro and know your place.
Cripes!