Matt Yglesias

Recapitalizing

The new plan as Hank Paulson gets around to doing what liberals were generally saying he should have done weeks ago — partially nationalize the big banks in order to recapitalize them. Here’s the money involved:

To the best of my knowledge, this is the right thing to be doing. Of course there are a lot of issues with the details, and I don’t really grasp them all, like how, exactly, this tiering system that determines how much money everyone gets was worked out.

32 Responses to “Recapitalizing”

1. Ed Marshall Says:
   October 13th, 2008 at 11:14 pm

   Yeah, that looks like an adult economist doing sensible things. Where are the neo-liberals? Why isn’t someone screaming that what we need to do is let the banks fail, institute an austerity regime, and starve out the poor?

   This would have been standard IMF dogma for a smaller country.

2. RKU Says:
   October 13th, 2008 at 11:20 pm

   I think it shows how shrewd the Wells Fargo people were…

   Without the Wachovia purchase, they would have been much smaller, and gotten much less of the Bailout money, which seems almost entirely size-dependent. I’ll bet that was exactly why they suddenly swooped in and bought Wachovia, and that’s just what I suspected at the time. There’s a huge advantage in suddenly becoming “too big to fail.”

   To the rough extent that the Bailout money is “free money”, they basically got Wachovia for almost net nothing.

3. aleks Says:
   October 13th, 2008 at 11:25 pm

   What is “senior debt?”

4. mercurino Says:
   October 13th, 2008 at 11:28 pm

   i’m most worried about the fact that these are non-voting shares. seems to me if the government is getting equity, they should get a seat on the board.

   by contrast, in the UK they’ve got voting shares, a say in what investments are made, and they’ve fired all the executives. that’s what we call a win, win, win.

5. Marshall Says:
   October 13th, 2008 at 11:39 pm

   What is “senior debt?”

   Bonds whose owners have first dibs on the company’s assets should it go into bankruptcy.

   i’m most worried about the fact that these are non-voting shares

   Yes. Why should the taxpayer’s be on the hook for debt and other commitments the companies make without a say in those decisions? Of course, that’s probably no worse in this version than in the original bailout.

6. Simpson Says:
   October 13th, 2008 at 11:41 pm

   I’m not sure if Paulson is a brilliant political strategist or just flying by the seat of his pants.

   No way the House GOP would have agreed to government ownership of our major banks. Did he always plan this approach and just sell the package to the GOP as an asset purchase?

   Or did he only think of this idea when the Brits showed the way?

   Either way, good result.

   Will it be enough though?

7. blah Says:
   October 13th, 2008 at 11:53 pm

   What can be done to stem the crisis? Aid to homeowners, though desirable, can’t prevent large losses… will take effect too slowly…. The natural thing to do, then — and the solution adopted in many previous financial crises — is to deal with the problem of inadequate financial capital by having governments provide financial institutions with more capital in return for a share of ownership. This sort of temporary part-nationalization, which is often referred to as an “equity injection,” is the crisis solution advocated by many economists — and sources told The Times that it was also the solution privately favored by Ben Bernanke, the Federal Reserve chairman.

   But when Henry Paulson, the U.S. Treasury secretary, announced his plan for a $700 billion financial bailout, he rejected this obvious path, saying, “That’s what you do when you have failure.”…

   http://delong.typepad.com/sdj/2008/10/paul-krugman-th.html

8. EL Says:
   October 14th, 2008 at 12:07 am

   “Did he always plan this approach and just sell the package to the GOP as an asset purchase?” I think Paulson and Bernanke had to water board Bush to get him to agree to slightest free market interference, but they may have realized once they started the ball rolling they would wind up with capital injection because capital injection is the only solution that has the only chance of success. And even capital injection is not a guaranteed success. If the TED spread remains above 2.0 (it’s now about 4.32), credit will still be historically tight…not a help in a recession.

9. EL Says:
   October 14th, 2008 at 12:09 am

   Correction: “that has any chance of success.”

10. mercurino Says:
    October 14th, 2008 at 12:28 am

    looks like brad delong agrees with the “non-voting preferred shares” nonsense–although his post suggests he’s been dipping into the two-buck chuck a bit too much tonight…

11. mercurino Says:
    October 14th, 2008 at 12:29 am

    that is, delong thinks the gov’t should have a voting stake. perhaps i’m a bit too far into the Old Fitz.

12. Glaivester Says:
    October 14th, 2008 at 1:10 am

    I think what would have been a good policy would have been for the government to have made paying principle on a mortgage tax-deductible. It would only take effect for mortgages done in the first half of 2008 or before, and could only be done up to a certain limit (say, $50,000 a year, and for incomes above $100,000 ($200,000 for a couple filing jointly) the amount would reduce linearly to zero as the income approached $250,000 ($500,000 for a couple).

    If more people were encouraged to retire debt, that would give the banks more capital to work with.

    We could fund it by taking the money of of Irat-hole (er – Iraq).

13. Adam Freeman Says:
    October 14th, 2008 at 1:11 am

    The problem is it only captionalize the biggest banks on or near wallstreet not neighborhood or regional banks. So the goverment is going to continue to allow smaller regional banks to fail. National City, Key Bank, SunTrust Bank. You want more comeptition not less. Goldman Sachs, State Street and Bank of New York aren’t even consumer banks. More federal money needs to go to regional banks.

14. TH Says:
    October 14th, 2008 at 1:19 am

    Matt, there’s no great science to how much money everyone got. It’s roughly (very roughly) proportional to how big each bank is. But with nice round numbers.

15. max Says:
    October 14th, 2008 at 2:08 am

    To the best of my knowledge, this is the right thing to be doing.

    It’s an improvement over the previous idiocy. Still not happy.

    * Buy preferred stock

    That give cash to the banks in return for equity, so that’s ok, but we get not voting shares. Paulson is doing everything he can to acoid the government taking the banks over.

    * Guarantee new senior Debt

    That could be a lot of money. I’m assuming they’re trying to allow recapitalization from private equity. That makes some sense; it could also be a trivial amount of money or it could be huge (which would be a problem).

    * Provide unlimited FDIC insurance

    Unlimited. Ugh. That is a lot of free money to give away just for the oportunity to avoid government takeover of GS. It does what you want, that is, make it so bidnesses can be sure their deposits are protected. The problem is, is that people tend to withdraw or reduce business activity even if they think they’ll get their money back if the bank fails. Meantime, the Feds are on the hook for a lot of money.

    Effective this is government as a deposit institution – and the Fed is already becoming a lending institution… so what do what do we need private banks for?

    So it looks like a stagger in the right direction, but it’s risky and dangerous in its own right.

    max
    ['Recall that Fannie and Freddie had implicit government guarantees but this did nothing to keep them from failing.']

16. chew2 Says:
    October 14th, 2008 at 2:13 am

    This is not nationalization, because there is little or no control by gov. So can’t force the banks to lend as with the British “nationalization” which does come with conditions and controls.

    They are buying preferred shares only, with no voting rights. Moreover no right to convert to common stock so no upside potential. Preferred get 5% interest payments going to 9% after some years. Idea is banks will buy back the preferred in the future and to encourage private capital to invest also. Basically they are making a loan to the banks on very favorable terms, much less onerous than the deal they exacted from AIG or the 10% convertible preferred Buffet got from Goldman Sachs. There is no attempt to weed out the weak banks and close them, and it is unclear what happens to the government’s preferred if the bank goes under.

    My initial reactions is that this is something of a gift to the banks.

17. Ed Says:
    October 14th, 2008 at 3:33 am

    With all these plans, somehow I keep thinking of the successive Pirahna brothers plans to become master criminals.

18. rapier Says:
    October 14th, 2008 at 5:36 am

    The numbers were pulled out of their ass, the big friends of Hank getting the most. Except Goldman because frankly giving them more and putting them in the top tier would just not look good.

    Nobody knows the details because they haven’t been worked out yet. It’d all ad hoc. Besides they will change the details at will. That said the plan provides a lot of flexibility. It remains to be seen if Obama will really put the screws to them for what is sure to be a trillion dollars put in.

    This change of direction is a huge and well deserved humiliation for Paulson. Give him some credit for changing course. The first plan, buying up crap, was obviously designed as Paulson’s version of Let’s Make a Deal with Hank tipping off what was behind the curtain to the select few and removing the car from behind the curtain just as the schmucks chose it.

19. rapier Says:
    October 14th, 2008 at 5:48 am

    All that said, post 18, the new plan is no miracle cure. Robbing Peter Taxpayer to pay Paul Big Bank isn’t going to cure much of anything. The Treasury is still destroyed. Which the paranoid among us, including me at some moments, think was the plan all along.

    It’s entirely possible that the bonds of those at the top of the list will soon carry lower interest than Uncle Sams and become the worlds defacto benchmark securities. In a few years the Treasury may be going to them to ask for a bailout and they will set the conditions. Like say, cut SS benefits.

20. Stav Says:
    October 14th, 2008 at 9:38 am

    “You can always count on Americans to do the right thing — after they’ve tried everything else.”

    Winston Churchill

21. BaxterJ Says:
    October 14th, 2008 at 7:57 pm

    Do you think the average American has a clue what this means?

22. wells fargo financial Says:
    December 6th, 2008 at 10:40 pm

    NEW YORK – US BANK Wells Fargo said on Monday it had raised US$12.6 billion (S$18.8 billion) in a stock offering in preparation for its acquisition of rival bank Wachovia. ‘This is the largest issuance of common stock by an

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