Like dozens of economists and other observers (e.g., us), George Soros is relieved that Hank Paulson has finally switched to a smart bailout plan: injecting equity into banks instead of buying crap assets (he’s still doing the latter, but mostly through Fannie and Freddie). In an FT column, Soros has also been kind enough to lay out an instruction manual about how to do it right:
- Bank supervisors estimate how much capital each bank needs.
- Managements of solvent banks then either raise capital privately or from the Treasury. Any Treasury investment should be in the form of convertible preferred stock, not warrants, and should carry a low coupon (5%), so as not to put pressure on the banks’ earnings.
- Existing shareholders should be given the right to invest on the same terms as the Treasury, thus allowing them to avoid dilution. This is important and smart. It will also reduce the amount of capital the Treasury has to provide. The rights should be transferable, so other investors can act on them if the existing investors choose not to. If such rights are including, Soros has already said that he will be one of the buyers.
- Reduce minimum capital requirements to encourage the banks to lend. Raise them again later, when the crisis has passed.
- Guarantee interbank lending for the recapitalized and solvent banks. This, too, will encourage banks to lend.
Soros also thinks the US government needs to address the housing market (and consumers) or run the risk that overshooting house prices will eventually undermine the recapitalization program.