So they keep telling us that we have to invest in junk debt to the tune of a few hundred billion or maybe a trillion dollars, because the whole financial system is on the verge of collapse. President Bush explained to us yesterday that the infusion of public wealth into private enterprise is necessary to keep lines of credit open for business, otherwise many of them will cease to exist, and for citizens, who otherwise will not be able to get loans for homes, cars, college.
Everyone and their brother has screamed for oversight, and it looks like that will be part of the package (though having the mechanism does not mean oversight will occur- look at Iraq for a sobering example). Equity stake? Maybe, though that's still opposed by the administration. Limits on executive compensation may be the big "win", if anything in this can be properly called a win.
My laundry list of adds includes things that will, apparently, not gain ground: The ability of bankruptcy judges to reset loan terms, moratorium on Wall Street lobbying, these things will be tossed. Most importantly, I am not hearing anything about investment in the much mourned Main Street.
I think it's important to remember something about the Great Depression: in addition to a needed regulatory regime and insurance structures, the Depression was addressed with substantial investment in the country's Main Street. Infrastructure projects and even humanities projects put people to work, creating wealth at the bottom, which in turn created the need and means for businesses to grow.
The idea that Main Street will recover this time with simply the ability to take on more debt is, I think, deplorable.
Another thing: while the New Deal helped stop the bleeding and enabled the slow healing of wounds, the wealth of the country really only picked up after we entered WWII and commenced massive war spending.
This time around, I think we'd all like to avoid a world war, so we should probably figure out what our government's investing priorities should be outside of the Pentagon and Wall Street.
4 comments:
As I understand it (and believe me the "Street" is still trying to get its head around how this is going to work) is that the "bailout" is going to be executed along two separate lines.
First, there is going to be a reverse bid auction (sellers sell their assets at offered prices, with the lowest prices being filled first). The taxpayer's Trust will then get these assets in place of cash--so we're not getting nothing for something. Supposedly the assets will be bought somewhere between firesale prices versus maturity value. Current firesale prices are between 20 and 30 cents on the dollar based on recent deals, while Pimco's Bill Gross (who said he will work for free and is highly respected/smart) says the assets are more properly valued at 65 cents which would yield taxpayers around 6-7%. Maturity value will be determined by number of foreclosures and how soon mortgages are paid off.
The second approach is going to be where a bank needs to be recapitalized. These deals can occur (under oversight) but only for an equity stake in the company. Similar to the deal that was done with AIG which at least on paper has already made money. Realize, that in addition to an 80%equity stake in AIG, AIG is paying higher than market rates on its $85billion loan. There is a lot of incentive to pay it off sooner than later, so the company is already selling off its assets to raise cash to do just that.
In a way, regular joe taxpayer is finally participating in a high-net worth investment called a distressed asset/private equity hedge fund.
Said otherwise, the USA just started up a sovereign wealth fund. I'm willing to predict that when all is done, there is going to be a positive return back to the taxpayer on this. Remember the old saying to buy when there is blood in the streets--this may just end up being a great trade!
Mack
Hey Mack:
I hear you, and I've read all those things too, but first of all there isn't any agreement yet on equity, and second, it's a big gamble under any circumstances.
What I'm saying, though, is that I think this action, if taken, needs to be accompanied by regulatory reform (which I know you agree on) and infrastructure investment.
Call me crazy, but wouldn't $700 billion damn near provide health insurance coverage to everyone in America who doesn't have any?
Wait...that would be socialism.
Giving money to millionaire dickheads who are about to pay the piper for their own greed...not socialism.
Like I keep saying. The Republicans are reinventing themselves more often than Madonna these days.
Hey Dev:
It is amazing what we can afford when it's for corporate rescue or endless war, isn't it?
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