One of the most galling aspects of this crisis is the refusal of Hank Paulson and Ben Bernanke to revisit the core concept of their bailout plan: overpaying for crap assets. So as Congress points fingers and Hank and Ben change a couple of sentences in the bill and get ready to resubmit it, let’s revisit:
Paulson’s plan is fine as long as the government pays market prices for those trash assets — Warren Buffett, Bill Gross
Bad idea and won’t even work: — Reader, Asset manager
Not sure why so few people seem to fully appreciate the problem of overpaying for bad assets. Even if fully funded, the Paulson plan would only purchase a fraction of the bad assets, leaving banks with hundreds of billions in more firmly overmarked assets. Part of the reason banks aren’t lending is that they are hoarding capital to protect against future writedowns.
Ideally, you want 1) banks to immediately write down everything to a level where there is no risk of future writedown; and 2) simultaneoulsy recapitalize the banking sector. The Paulson plan would sort-of accomplish a little bit of #1 (by getting some bad assets off books) and a little bit of #2 (by overpaying and buying warrants).
In the context of the worst financial crisis since the Great Depression, it’s a pretty shitty plan. It was also, we have now learned, politically naive.
Logic tells me Congress will get something passed, but it’s hard to read the politics. Democrats, who feel Republicans just screwed them, may not simply give the Republicans a do-over, especially if Democrats believe continuing turmoil solidifies Obama’s lead, and the Republicans may balk at further concessions.
It’s all Paulson’s fault. — Reader, Bank analyst
(1) I totally agree with yesterday’s WSJ article that laid the blame for the
crisis at letting LEH collapse in the way that they did. That’s what turned
systemic stress into a full blown, systemic funding crisis.
(2) This led Paulson to bring forward a rushed, flawed plan. It is easy to
hate on a number of levels, and Paulson probably realised it was flawed, but
he has just desperate to create the “greed motivation” from private capital
(“I’m going to miss this historic bottom in the MBS market”) rather than the
fear motivation (“MBS go down every day so let’s stay on the sidelines
there, reduce our bank exposure and keep our powder dry in treasuries….)
(3) His intention to mobilize private capital is absolutely the correct
thought process, and the details of the plan would have been of secondary
importance had the market just believed relief was on the way. But he sold
it poorly, and the political freak show that ensued in the last week is not
inspiring anyone’s confidence.
(4) The markets (both credit and equity) now “expect something.” Doing
nothing would now be catastrophic. Doing something thoughtful and considered
would take weeks and is not really an option in terms of the timeline,
either politically of in terms of the funding crisis. As a result, congress
will probably approve some face saving version of the measure we voted down
(5) It will cost a lot more and be less effective than had they just
backstopped Lehman first place or given Paulson what he asked for.
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