Research Roundup: Paulson-Bernanke Plan
The only certainty about the Paulson-Bernanke plan is its uncertainty. Opinion among economists, bloggers and other observers run the gamut from “necessary evil” to “outrageous and overreaching.” A consensus does seem to be developing that a plan will emerge within a week or so that includes some level of equity participation for taxpayers, greater congressional oversight, some help for strapped homeowners and perhaps some sort of curb on executive paychecks. One flimsy argument against taking equity in the affected financial institutions is that it might deter their participation. A more likely explanation is that it pushes the government even further down the road to socialism. Who would have believed that a Republican administration would find itself “nationalizing” financial institutions?
Here is a selection of some the more interesting and in some cases unconventional comments on the crisis:
Mark Thoma at Economist View offers a devil’s advocate argument in defense of paying a premium to current prices under the plan:
For markets to function according to competitive ideals, full information must be available to all market participants. When information is lacking, or when it is asymmetric, the outcome is inefficient relative to the full information outcome.
Barry Ritholtz at The Big Picture has 14 questions for Bernanke and Paulson:
Bonus comedy question: Are you now, or have you ever been, a Socialist? Do you know, or associate, with other Socialists?
Brad Setser at the Center for Geoeconomic Studies places the plan in the context of investments in the financial sector by Sovereign Wealth Funds.
The US taxpayer is now being asked to invest $700b to help recapitalize the global financial system – a sum that is more than 10 times as much as the world’s sovereign funds put in.
But, at least as I read Paulson’s initial proposal, the US taxpayer would not get any equity in the world’s large financial institutions in exchange for this help.
Naked Capitalism questions the premise that the banking industry must have government help to get back on its feet.
A banking industry expert, Bert Ely, who has a stellar track record in predicting crises and calling false alarms says that the banking industry can handle this mess internally and does not need subsidies.
John Hempton at Bronte Capital looks at the plan in the context of the Japanese and Norwegian bank collapses:
If you think that the Norway experience can be duplicated in any bank bail out – then unfortunately you are sadly mistaken. I doubt the average government can identify the difference between illiquidity and insolvency.
Perhaps, then, they should read Paul Kedrosky at Infectious Greed who explains the difference between lliquidity and insolvency:
So, could you have a bailout in which some toxic paper is bought from some (currently) healthy banks? Of course you could. Get over it already and let’s be adults about this stuff.
Nouriel Roubini at RGE Monitor, who has had a good track record so far during the crisis, thinks hedge funds and private equity wil be the next victims:
The next stage will be a run on thousands of highly leveraged hedge funds. After a brief lock-up period, investors in such funds can redeem their investments on a quarterly basis; thus a bank-like run on hedge funds is highly possible. Hundreds of smaller, younger funds that have taken excessive risks with high leverage and are poorly managed may collapse. A massive shake-out of the bloated hedge fund industry is likely in the next two years.
Roger Ehrenberg at Information Arbitrage looks at the impact of Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) becoming regular banks.
Will Goldman and Morgan Stanley make the jump to behemoth (with a more stable, longer duration capital structure to support such a business) or pull back on focus more intensively on high fee-generating, less capital intensive businesses? I’m guessing they’ll go for being a behemoth but it is not clear that this is ultimately best for shareholders.
Warren Buffet’s bold investment in Goldman has done more to instill some confidence in the markets than all the jawing by Paulson and Bernanke, through as Felix Salmon at MarketMovers points out, news events have had little impact on Goldman’s stock price. Salmon also dissects a letter signed by a number of economists that is critical of the Paulson-Bernanke plan.
Meanwhile, Calculated Risk predicts that Goldman will use their new cash to acquire a commercial bank:
Goldman will buy some commercial banking assets by Friday. This is just a guess because of recent events: Goldman becoming a bank holding company, and Buffett investing in Goldman.
[It can not be good news for many mid-size commercial banks that Goldman and Morgan Stanley will be muscling in on their turf.]
CreditSights is “most interested in how this proposed plan can influence the type and pace of bank consolidations that seems to be part of ultimate resolution of some banks problem assets.”
Bigger troubled banks like WaMu (NYSE: WM) and Wachovia (NYSE: WAC) could benefit from the process once it is enacted and operationalized. But if the details are delayed by the political process and flexibility limited, this could delay some resolutions or lead to more negative outcomes for credit instrument holders.
Noting that major U.S. bank and brokerage firms’ exposure to risky Level 3 assets was at least $632 billion as of midyear 2008, Standard & Poor’s newly formed independent Market, Credit, and Risk Strategies group concludes that “the government bailout plan could end up costing less than the $700 billion headline figure.”
If the Treasury’s bold plan succeeds in stabilizing the credit markets, restoring confidence so that private-sector interests can now step in to bid for distressed Level 3 assets before the Treasury Dept. gets a chance to “cherry-pick” the balance sheets of major financial institutions, then it is plausible that the U.S. Treasury may end up spending a lot less than the $700 billion it is requesting from Congress.
Finally, FT Alphaville offers up a version of the “Nigerian email scam” that is scarily close to the mark:
I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude. I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of US$800 billion. If you would assist me in this transfer, it would be most profitable to you.
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