Matthew Yglesias » Buy The Companies, Not the Assets

Sep 21st, 2008 at 12:22 pm

Buy The Companies, Not the Assets

I said this yesterday citing Doug Elmendorf and now Paul Krugman’s saying the same thing. It seems that it’s genuinely necessary for the government to give a large sum of money to financial services firms in exchange for something. But the issue is: In exchange for what? Under the Paulson Plan, in exchange for public money the taxpayers will get distressed assets. In a better plan, in exchange for public money the taxpayers will get equity in the bailed out firms:

Or I should say, the [Paulson] plan does nothing to address the lack of capital unless the Treasury overpays for assets. And if that’s the real plan, Congress has every right to balk.

So what should be done? Well, let’s think about how, until Paulson hit the panic button, the private sector was supposed to work this out: financial firms were supposed to recapitalize, bringing in outside investors to bulk up their capital base. That is, the private sector was supposed to cut off the problem at stage 2.

It now appears that isn’t happening, and public intervention is needed. But in that case, shouldn’t the public intervention also be at stage 2 — that is, shouldn’t it take the form of public injections of capital, in return for a stake in the upside?

Let’s not be railroaded into accepting an enormously expensive plan that doesn’t seem to address the real problem.

Exactly.

Comments
27

27 Responses to “Buy The Companies, Not the Assets”

max Says:
September 21st, 2008 at 12:51 pm
Did you see this from Yves Smith, Matthew?

Confirmation of our view came from a reader by e-mail:

I worked at [Wall Street firm you've heard of], but now I handle financial services for [a Congressman], and I was on the conference call that Paulson, Bernanke and the House Democratic Leadership held for all the members yesterday afternoon. It’s supposed to be members only, but there’s no way to enforce that if it’s a conference call, and you may have already heard from other staff who were listening in.

Anyway, I wanted to let you know that, behind closed doors, Paulson describes the plan differently. He explicitly says that it will buy assets at above market prices (although he still claims that they are undervalued) because the holders won’t sell at market prices. Anna Eshoo pressed him on how the government can compel the holders to sell, and he basically dodged the question. I think that’s because he didn’t want to admit that the government would just keep offering more and more.

I don’t think that our leadership has been very good during this negotiation (or really, during any showdowns with this administration) at forcing the administration to own their position. If Paulson wants this plan, then he needs to sell it to the public, and if he sells a different plan to the public (the nonsense buying-at-market-price plan) then we should pass that. I’d rather see the government act as a market maker for the assets to get them transferred over to private equity firms and sovereign wealth funds and other willing holders. And if we need to recapitalize these companies, it seems like the cheapest way for the taxpayer is to go in and buy up the distressed debt and then convert that to equity.

max
['He thinks the assets that they can't sell at the prices they want are undervalued.']
kafka Says:
September 21st, 2008 at 12:51 pm
“It seems that it’s genuinely necessary for the government to give a large sum of money to financial services firms in exchange for something. But the issue is: In exchange for what?”

The issue is also whose sum of money is being given away. This could be at least partially financed by repealing the BushCo tax cuts for the rich. But we all know it won’t be.
El Cid Says:
September 21st, 2008 at 12:53 pm
I’m sorry, I don’t care whether they define these as “assets” or whatever, if we hand them 3/4 of a $Trillion in unmarked bills to do with what they want without review, supervision, court challenge, nada, we will never, ever, ever see a dime of this money back, ever.
allbetsareoff Says:
September 21st, 2008 at 1:15 pm
Philosophically and temperamentally, I feel what Matt’s saying. However, let’s ponder the prospect of the feds taking control of companies and handing over their management to Bush-era mid-level bureaucrats vetted by who knows how many Monica Goodling clones.

Are there enough competent people left on the functional levels of the Treasury Dept. and regulatory agencies to manage dicey assets, let alone dicey companies?

I would feel a lot better about this bailout if they drafted loan officers and CPAs from Topeka and Terre Haute for actual day-to-day management.
esaund Says:
September 21st, 2008 at 1:25 pm
One item that the public needs to get in return for any bailout is a GS salary scale imposed on executives, as well as union-scale wages and benefits (including health care) for workers.
Brian D Says:
September 21st, 2008 at 1:28 pm
Wouldn’t your proposal entail the government having a direct, vested interest in the prosperity of certain corporations over others? Think of how bad it seemed when representatives of large oil companies were helping write energy policy, and then think of how much more of that there would have been had the government had a 10 percent stake in Exxon and Chevron.
mpowell Says:
September 21st, 2008 at 1:31 pm
Brian D:

I think you’re wrong about that. I’m not all that worried about the government having a conflict of interest in policy-making. At least the beneficiaries are the American public. What is far worse is when officials within the government have a conflict of interest, because then the beneficiaries are the members of the plutocracy. And that’s what we’re talking about giving a blank check to Paulson to buy crap from companies his pals work at at whatever price he personally deems appropriate.
Hedley Lamarr Says:
September 21st, 2008 at 1:41 pm
Other demands that should come up next week are a cutoff in funding for Iraq and a gradual and prudent drawdown of forces, and agreement with the Republicans who are running and benefiting from this bailout to provide for health care for all Americans in the next administration.

If they stop at merely 26 more weeks of unemployment comp you will know Dems are complicit in the Great Shakedown.
kafka Says:
September 21st, 2008 at 2:39 pm
Are there enough competent people left on the functional levels of the Treasury Dept. and regulatory agencies to manage dicey assets, let alone dicey companies?

We already know there aren’t. But self-evidently the people on Wall Street don’t have the competence, either. So what’s the 3rd choice?
Emma Zahn Says:
September 21st, 2008 at 4:17 pm
What significant assets do financial service firms have except paper and their reputations? The paper is toxic and their reputations ruined. Okay, maybe some of their people are huge assets but you can’t own people. What’s to buy except the paper?
Harvey Lobster Says:
September 21st, 2008 at 4:28 pm
Brian D:

I see your point. Given the breadth and depth of the problem, I think the obvious solution is to nationalize large segments of the financial sector – if it’s over-leveraged, illiquid and in danger of collapsing, nationalize it. If we’re nationalizing whole sectors, instead of individual firms, the problem you raise won’t be an issue.

I’m actually not a real socialist, and don’t think the government should *keep* control of the financial sector. But nationalization strikes me as a vastly better option from the taxpayer’s point of view than the “deal” they’re trying to shove down our throats.

And for those concerned about the competence of the treasury department – I sure hear you. But seriously – what better options do we have? Hire back the geniuses who ran all of these ships into the ground?
allbetsareoff Says:
September 21st, 2008 at 4:59 pm
OK, I was engaging in a bit of hyperbole when I nominated loan officers and CPAs from Topeka and Terre Haute. But there must be a talent pool of pre-go-go-era financial types out there who can be called upon to sensibly manage the bailout.

Also, I’m now reading that the bailout plan calls for Treasury, et al., to have power without congressional oversight. Is that true? If so, no deal, no way.
Tom Maguire Says:
September 21st, 2008 at 8:20 pm
Or I should say, the [Paulson] plan does nothing to address the lack of capital unless the Treasury overpays for assets. And if that’s the real plan, Congress has every right to balk.

My goodness. If the financial services sector is undercapitalized (and they are), then the asset/capital ratio is too high. They solve that either by (a) raising capital or (b) selling assets.

The Treasury plan is (b), a sale of assets from the financial services sector to the Treasury.

As a matter of fact, the sector may still be undercapitalized even after these sales. But as a matter of theory, it is absurd for Krugman to say that the Treasury plan does nothing to address the capital deficiency and that only premium payments can solve the problem.

There are plenty of good reasons to object to this plan – why make stuff up that isn’t true?
Rivrman Says:
September 21st, 2008 at 10:32 pm
Forgive me for not understanding your argument,Tom, but it doesn’t seem to me that a firm will increase their asset/capital ratio by exchanging one asset (the securities) for a different one (cash) unless they do so at a gain, that is, in this case, as Krugman states sell the securities for more than they are worth. Capital in the asset/capital ratio is not cash but rather the owners equity in the firm – the difference between the total assets of the firm over its liabilities.

Krugman’s suggested solution of haveing the government purchase an equity interest in the firm will, on the other hand, have the desired affect of increasing the asset capital ratio since both the assets and capital will increase by the same amount.
riverman Says:
September 21st, 2008 at 11:06 pm
Sorry, I should have written decreasing the asset/capital ratio in the last sentence above.
MGCC Says:
September 22nd, 2008 at 9:01 am
Riverman, you miss the follow up action by the investment firms: 1) sell distressed mortgage-related securities, 2) receive cash (assets still equal, leverage unchanged) then 3) PAY OFF DEBT. That will reduce leverage/raise capital ratios.
MGCC Says:
September 22nd, 2008 at 9:05 am
Kafka, you assume that repealing the Bush tax cuts will raise large amounts of tax revenues, or raise revenues relative to GDP. I’m not sure that is the case. Taxes paid by the richest 1%, 10%, and 25% have been increasing steadily since enactment of the Bush cuts, in absolute terms, as % of total taxes paid, and as % of GDP. Don’t take my word for it. You can calculate this yourself easily – the Department of Treasury web site has an Excel sheet you can download with tabs for tax take by income percentile and tabs for Gross and Real GDP. The rest is just math.
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Matt Yglesias

Buy The Companies, Not the Assets

27 Responses to “Buy The Companies, Not the Assets”

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