Preferred Asses, Maybe
Posted by TFG on October 10th, 2008
There are two ways under consideration, not counting the Irish Solution, that banks can be rescued. The first is the only way we talked about initially which is buying up all the toxic assets and then setting them aside - taking all of the question marks off of the books of the banks. The second way is the new interesting way which is to have the banks issue new preferred stocks for the Fed to buy. The Fed holds them and that encourages common shareholders to try and get the more secure capital, the new preferred stocks. The second way adds value directly with cash.
Who understands that? I do, kinda, sorta, in a real hayseed way. But. It is not and never should be the arena for We, The People. Sink or swim, greedy banker tycoons (and sorry, all you minions caught in the riptide being carried out to sea to be eat up by sharks, but hey, that’s capitalism — hope you loved the ice-sculpture swans at the annual kickoff)…at this point, I really do think it’s that damn simple. If it’s not glaringly blindingly crystal fucking clear that the bailout did not do diddly to calm the markets anywhere on the freaking planet.
Right below what I’ve quoted from Cobb’s post is a damn fine reason for Congress to sit on their hands, not that such will ever happen. Not in our lifetimes, I really think not.
October 11th, 2008 at 9:06 pm
The problem is that We, The People are left holding the bag one way or the other. If we stay out of the way and let the crisis run it’s natural course, we lose everything and endure Great Depression II. If we intervene, we end up holding a lot of stinky-bad assets.
It’s worth remembering, while making that Hobson’s Choice, that the banks and insurance companies most in danger of failing are not necessarily the people who took big risks. To the contrary, mortgage-backed securities were AAA-rated sure-things, the safest investments you could buy. That’s why they’re all held by banks and insurance companies instead of, for example, high risk/high reward hedge funds.
The people who took the big risks were generally the fee-based mortgage sales companies who had no stake in the borrower’s ability to repay the loan and the bundlers of those mortgages into impossible-to-understand securities and derivatives. There needs to be a shout-out as well to the irresponsible homeowners who borrowed more than they could ever repay, gambling that housing prices would continue to climb.
Drawing a line and saying “you took the risk, you take the fall” is thus counterproductive in two ways: it penalizes people who were generally prudent and cost us way more in the long run (depressions aren’t cheap) than intervening in the crisis.
That said, the plan to recapitalize banks and insurance companies (as opposed to buying-up questionable assets) is probably preferable, since it has as much chance of being effective as any other plan, affords taxpayers the significant possibility that they will recoup their losses through interest payments and the eventual buy-back of the preferred stock, and gives the government a clear exit strategy. The exit strategy is important because 10 years from now we don’t want every financial institution in the country to have a government representative on its board of directors.
October 12th, 2008 at 6:59 am
If we stay out of the way and let the crisis run it’s natural course, we lose everything and endure Great Depression II.
That’s just impossible to say with any certainty. It’s certainly what a whole bunch of people would like to have us believe.
To the contrary, mortgage-backed securities were AAA-rated sure-things, the safest investments you could buy.
That tells me that someone, somewhere doesn’t know what the hell they’re doing, since they quite obviously are not so safe. I don’t think you need hindsight to see this, either, not when every website in the world had animated ads begging you to take out a $500K home loan.
gives the government a clear exit strategy
You and I disagree on the government and exit strategies. Govt wants to be on the boards of banks.
October 12th, 2008 at 7:40 am
Capitalism is dying and it isn’t because of Karl Marx. If we don’t allow people to fail then we no longer have capitalism. This is perhaps too subtle a point for the really intelligent to grasp, but they have meddled with the primal forces of nature. Nature will win. And paybacks are a real bitch.