Making Paper
One thing that I don’t think is getting an adequate amount of attention is that every well-informed person I talk to thinks the odds actually favor the government turning a profit on all these recent shenanigans. Basically, there were assets that were genuinely overvalued, but the real crisis has to do with a systemic cash flow problem that’s reduced the value of this stuff to basically zero. The government, however, has no cash flow problem and if it buys this stuff up for cheap and is able to hold it for a while and sell it off gradually will probably make money.
To help understand why in broad terms, the thing to realize is that the US government can borrow money on much more favorable terms than basically any other institution in the world. In general, borrowing money at those rates and investing it in just about anything would be a pretty savvy play. Selling Treasury bonds and using the proceeds to buy a broad index of stocks would, over the long run, make the government a ton of money. Normally, we don’t have the government buy up assets like that not because it’s a bad investment but because, politically, it’s deemed a bad idea to give the government that kind of stake in the private economy. But in times of crisis, those restraints go out the window.
24 Responses to “Making Paper”
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September 19th, 2008 at 5:27 am
I like it — Uncle Sam as Warren Buffet.
September 19th, 2008 at 10:16 am
i’m trying to figure out what you mean by “systemic cash flow problem.”
my read is that overly leveraged financial institutions, faced with rapid recognition of overvalued assets on their books, can’t raise money quickly enough due to the risks.
now, if you mean that’s a “systemic cash flow problem,” ok, but i’d suggest you think about this: if there was really a good reason to think AIG was a good buy as is, warren buffett had the cash to do it, and he’s an insurance man at core.
September 19th, 2008 at 10:23 am
I don’t think the chances of the government turning a profit overall are especially good. The Bear deal was pure downside, and the RTC sounds like a toxic waste dump. Some of this stuff is money good and only trading for pennies on the dollar for liquidity reasons, but a lot of it is really garbage. I think the losses to the government will be much greater than with the original RTC.
I’m just hoping for minimized taxpayer losses, rather than gains on all this.
September 19th, 2008 at 10:42 am
matt, your assumption that the government is more likely to make a profit than offer these assets to cronies and supporters who will in turn make a profit flies in the face of recent and perhaps all of american history. What privatazation of public assets has yielded significant profit making making for the government especially as compared to the profit making that occurred at the point of purchase by the purchaser?
Who will make the profit largely depends on what party is in power at the time the assets are disbursed. Since the republicans tend to believe more in privatazation, it seems likely to me that as soon as they have power in a better environment, their friends will get large companies at discount prices.
September 19th, 2008 at 11:00 am
I think it depends on the deal. Knowledgeable people I have talked to think the AIG transaction, for example, was indeed a good deal for the Fed in that AIG selling its non-insurance assets will be sufficient to pay back the loan. The consensus on the non-recourse loan in the Bear Stearns case, however, seems very different, with significant doubt remaining about whether the Fed will get all of its money back.
September 19th, 2008 at 11:08 am
Alan is exactly right here. The govt. won’t profit because “principled and very serious conservatives” will point out that the government “has no business being involved in business!” And sell the pieces off at bargain-basement pricing.
September 19th, 2008 at 12:06 pm
Anyone who thinks that profits from these assets, won’t be channeled back to the same capitalist crooks who always benefit from govt. welfare,… you’re on the bridge to nowhere.
September 19th, 2008 at 4:05 pm
if the US government started it’s own sovereign wealth fund and but was mandated to only invest in a broad total market index then it wouldn’t be as distorting and interest conflicting as current foreign sovereign wealth funds, but I’m sure it’s still probably not a good idea.
September 19th, 2008 at 4:38 pm
Say not “in times of crisis”… because we’ve had crises before where restraints have held. Say rather, and bluntly, ‘Panic’.
September 19th, 2008 at 4:46 pm
I’m not certain that this is strictly correct. There’s a lot of poison in the assets, and the inability to locate and winnow the wheat from the chaff is a large part of the problem. Derivative default swaps hide a lot of poison while pushing them up the food chain, which is why Lehman went down: they had so much invested in assets for which they simply could not determine the real value that confidence plunged.
It’s kinda like saying a blind driver with a leadfoot will get you to your destination faster than a sighted driver with a map…
September 19th, 2008 at 5:44 pm
Now just ask all of those people who think the government will run a profit on this transaction if they support Kerry’s proposal for catastrophic health insurance, which is essentially based on the same cashflow dynamic.
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