Bush actually spoke frankly about the economy last night (“America could slip into a financial panic”), and now Congress appears to be getting closer to rubber-stamping the Hanke-Panke Wall Street Bailout.
The latest potential compromises:
- Ability to take equity when real money is at stake. This is smart and important. The whole plan should be recast to mirror the bailouts Paulson has already put in place–loans and/or equity infusions–but the addition of equity stakes is an improvement. Note, however, that Paulson would probably only use the equity stakes with banks that have admitted that they are on the verge of bankruptcy (e.g., WaMu). And what bank is going to admit that when the government will otherwise pay them for the privilege of hauling their trash away?
- Executive pay caps in cases where the government puts real money to work. This one is well-meaning but preposterous. How will the government possibly determine what is fair while at the same time making the pay high enough that executives won’t intentionally fly their companies into the ground? (for more on the absurdity of this, read John Carney).
- Tranches and success benchmarks. Instead of doling out the $700 billion all at once, Congress may give Paulson a couple hundred billion and see how it goes. This will cramp Paulson’s style, as he clearly wants to buy up as much garbage as possible as fast as possible. Gauging “success” will also be difficult, as it will be years before anyone knows what any of the crap assets are really worth. (Not that anyone other than the taxpayers really cares how the taxpayers’ crap bond fund does).
- Oversight from the General Accounting Office. Some oversight is obviously welcome, but if Hank Paulson can’t get it right, we’re not infused with confidence that GAO will, either.
The real problem with the Hanke-Panke plan remains the same: The government is agreeing to overpay for trash assets, thus bailing out banks at taxpayer expense. We’re fine with the concept of a bailout, and we’re even fine with it being big. But we think it should be structured so that bank shareholders and bondholders take the hit and taxpayers have a great chance of coming out whole: e.g., The Warren Buffett Way. This could take the form of equity, warrants, and/or loans instead of a paid waste-hauling service. But we’re still miles away from that.
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