We disagree with you plan and your speech and don’t believe the failure of any single company is large enough to jeopardize the US financial system. ONLY THE FEDERAL GOVERNMENT CAN DO THAT, and it takes rash and careless acts on a large scale–kind of like your bailout plan!
Given the overall level of available capital in both the world and US economy–as evidenced by relatively low interest rates, particularly short-term Treasuries–if these securities are valuable, then someone should be willing to purchase them (and, possibly do it quickly if the price is right). (Yeah, we know about contagions and herd behavior and how it could all fall down. We’re not that ignorant, but we just don’t see it happening, especially the withdrawal of credit to worthy borrowers.)1
If the securities are indeed worthless, then the bailout plan is exactly that: a bailout or a massive subsidization of lax management and excessive risk-taking in which the government gives $700 billion and gets nothing in return. (Being clever–or is that devious–bureaucrats could attempt to hide a slightly smaller subsidy (of less than $700B) by having the firms throw some good assets into the pool with the worthless ones.) Neither lax management nor excessive risk-taking should be explicitly rewarded today nor implicitly encouraged in the future, which is exactly what a true bailout would do.
Thus, if the bailout is simply a wealth transfer from taxpayers to these firms, then we encourage the government to nationalize the firms that have the greatest share of these securities (say, as a percentage of total assets based upon historical costs). By “nationalize,” we mean the government should take 100% ownership of the firms.
In that manner, extant owners will not benefit from the behavior that they induced through their indirect approval of their board of directors and senior management. In addition, there would be no need for the other current Congressional proposals about executive pay, etc. As the sole owner, the government could manage the firms as it pleases and pay civil service wages if it chooses. (We doubt that it would end well, though.)
Regular readers know that we certainly don’t recommend such a plan, but given the underlying assumption that the securities are worthless (and that it is simply a massive wealth transfer), then nationalization does seem to be the best way–and the only fair way–to recapitalize these firms.
Let’s be clear. Someone should be held accountable, BUT we do NOT mean criminally. We fear that when economic matters becomes politicized as in the current crisis, the feds will look to put someone in jail, e.g., the ongoing FBI fishing expeditions, err, investigations. No, we mean be held accountable economically, which we would prefer to see happen privately.
As we wrote earlier today (September 24) in Could a “Bailout” Prolong the Financial Crisis?, we would prefer to see the holders of these securities (among the commercial banks, at least) report their marks at the end of the third quarter, which is less than a week away. We ask Mr. Bush: why insist upon such a rush to approve legislation by the weekend? Why not at least wait until mid-October to see who’s lost the most on bad mortgage bets? Our point in the above post is slightly different. In it we argue that a bailout will increase the uncertainty of prices as each firm will likely have an otherwise higher value for its assets given the proposed government purchases.
Also, if you have the time, please take our Mortgage Bailout Survey.
(We’ll likely revise this post tomorrow as we formulate our thoughts more carefully and get feedback from the chairman. She is sleeping, and we dare not wake her.)
- Note that we italicized valuable because we do recognize that if there isn’t an inherent use for an item, particularly an intangible item like a security, then its value does depend upon the willingness of others to purchase it, which in this case depends upon their estimation of the item’s future cash flows. ↩
