realitybase - Journal

Here is an interesting alternative to yesterday's proposal by the Administration to authorize Treasury to buy up toxic debt from troubled financial institutions. Treasury could be authorized instead to buy stock in troubled financial institutions. Instead of being the buyer of last resort for all of the most toxic debt of unascertainable, but low, value, Treasury would be the investor of last resort at share prices that have been established by the market. The entity would get the same amount of cash infusion either way.

Update on Saturday, September 20, 2008 at 10:00PM by

Skeptic

Washington Post columnist Sebastian Mallaby makes the same proposal here, and refers to other experts for support.

Update on Sunday, September 21, 2008 at 11:14AM by

Skeptic

Paul Krugman analyzes the problem in cogent 1, 2, 3 style and reaches the same conclusion here. Just a few days ago the official solution to the problem was for troubled financial institutions to raise more equity capital, in other words, to issue stock at current low prices even though that would seriously dilute the existing shareholders. Well, the sovereign wealth funds and other big piles of uncontaminated cash didn't want to buy.

It's making more and more sense to me that if the government is going to inject massive cash into the financial system, it would be better to buy equity (which may be crap) instead of buying mortgage backed securities which have been specially selected and offered for sale precisely because they are 100% percent guaranteed toxic crap. This would punish the shareholders, which of course include you and me, but we don't deserve a taxpayer bailout.

Update on Sunday, September 21, 2008 at 12:05PM by

Skeptic

Obama has issued a "statement of principles" about Treasury's bailout proposal, which Brad DeLong has posted here. It appears that Obama is going along with the basic structure of giving troubled institutions good cash for toxic debt.

Incidentally, did you notice that Treasury is calling its proposal "troubled asset relief program?" This big blue TARP is going to be spread over Wall Street, making it look like New Orleans after Katrina.

Update on Sunday, September 21, 2008 at 04:33PM by

Skeptic

Mark Thoma says taxpayers must be compensated for taking risky stuff off the hands of financial institutions, but he's not fussy about how that's done. It could be equity, a contract for a share of profits for a certain number of years, or something else. Mark also re-posts some proposals by others, and goes on to say that if this turns out to be a money loser for the government, the loss should be covered by a tax on high earners because only they have benefitted from the financial bubbles. Ordinary middle class workers in the real economy have instead fallen behind.

Update on Sunday, September 21, 2008 at 10:23PM by

Skeptic

Politico summarizes criticism from many experts here. Maybe there are some expert proponents somewhere, but they are not making much noise. As of this hour on Sunday evening, worldwide equities markets are down and the TED spread is still over 2. It looks like the TARP is not a done deal.

Update on Tuesday, September 23, 2008 at 06:46AM by

Skeptic

Ed Paisley of Center for American Progress has a plan here. It's the only plan I've seen illustrated with cartoons. It's also the only plan that limits Treasury to purchasing only complete mortgages (Step 2), which may not address a large part of the problem. I understand that most of the problem mortgages are backing several different securities--some highly rated that are entitled to the first payments from the whole mortgage pool and some low rated that will feel the effects of the first defaults. The CAP plan seems to require that Humpty Dumpty be re-assembled before Treasury can buy. The purpose of this seemingly impractical task is to allow Treasury to re-write the individual mortgages (Step 4) so borrowers with adequate finances and credit can keep their homes--and keep their homes off the market where they will help force prices down more. News reports yesterday indicate that others are approaching this problem by expanding authority of bankruptcy judges to restructure home mortgages.

Update on Tuesday, September 23, 2008 at 10:03AM by

Skeptic

The same fellow who writes me from Nigeria with business proposals has rewritten Paulson's proposal and sent it to Ezra Klein. Maybe the rest of us will be lucky enough to get this same offer.