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Thursday, September 18, 2008

Bailout Bullshit


A few questions about the bailout:

1. What's the pound of flesh?

With AIG, the government got 80%. Lehman went bankrupt. Bear Stearns shareholders got hosed. Do shareholders and management get a free pass under this bailout?

Personally, I wouldn't suggest a pound of flesh. I'd suggest $10 billion a finger. Any CEO who wants to foist $10 billion face value of junk paper on the government should be willing to part with a finger. Maybe there are other suggestions, but this one's handy.

2. What's the price?

The talking heads on TV are saying nobody wants to buy this stuff because nobody knows what it's worth [either now or on a discounted cash flow basis after mortgage repayment]. But the financial firms have had years to study this stuff, and have detail on each mortgage.

The suspicion is that they know what it's worth (22 cents on the dollar, according to a recent Merrill Lynch sale), and it's not much. But they aren't saying what it's worth. How's the government to know?

Could they just turn over the bad paper now, and trust that the government will pay them what it turns out to be worth in due course? [Insert laughter here.] Or, agree to a long-term (30 year?) payback to the government for the majority of any loss the government may incur? If the problems are really just short term lack of confidence, wouldn't this make sense?

3. Will it work?

The talking heads really don't know.

4. Exactly how is this really like the RTC?

The Resolution Trust Company took assets the government ALREADY OWNED, because the ALREADY INSURED savings and loans had ALREADY FAILED. They then disposed of them and lost $billions.

We don't own the bad mortgages YET. We DIDN'T insure them. The main thing this has in common is that we'll likely lose $billions. (given the banks are the only ones that have the repayment information and it's the government that's later selling the assets)

Update

Yes, I've written my congressman and both senators.

Note I have already found somebody who agrees with me: Luigi Zingales, a finance professor at the University of Chicago, has posted similar concerns, phrased in a more academic tone (he doesn't mention the finger part).

http://www.marginalrevolution.com/marginalrevolution/2008/09/luigi-zingales.html?cid=131493872#comment-131493872
or
http://faculty.chicagogsb.edu/luigi.zingales/Why_Paulson_is_wrong.pdf

Update 2, Saturday morning Sept 20:

Now there's an AP story about the actual proposal, but

"The proposal does not specify what the government would get in return from financial companies for the federal assistance."

"Rep. Brad Sherman, D-Calif., who participated in the conference call. [said] "You give them good cash; they give you the worst of the worst," Sherman said. A critic of the plan, he complained that Bush and his economic advisers were trying to panic lawmakers into rubber-stamping it."