Todd Boulanger charged in Abramoff case.
See our earlier coverage of Boulanger’s part in the case at TPMMuckraker.com.
The Times has a story in tomorrow’s paper gaming out where the administration seems to be going on a comprehensive bank rescue plan. The gist seems to be that we’re heading toward some version of the ‘bad bank’ plan; but they’re moving cautiously so as to avoid the ridiculousness of the Paulson days, coming up with a new plan every week or so.
The message they’re clearly sending is: we’re not going to ‘nationalize’ the banks.
What I wonder, though, is whether or not we’re running into a semantic dead end that is obscuring some more pertinent questions.
The core problem is that many, perhaps most of our major financial institutions are insolvent. They have more liabilities than assets. A functioning financial system requires solvent banks. And only the government has the resources to manage the massive recapitalization to get the key institutions back on their feet. At that level of generality, the issue assumes a degree of clarity.
All the different fix permutations are just different ways of accounting for the transfer of cash. You can take the banks over and assume their debts. Or just give them tons of money to make them whole. Or you can buy their bad investments at the price the banks wish they were worth and thus get the banks out of under the consequences of the financial collapse they helped create.
It’s not clear to me why the dollar amounts spent would really be different in the various permutations. It’s all a question of who owns what when it’s all said and done and who runs the institutions. According to a brief aside in yesterday’s article in the Post, both Geithner and Summers are against having the government run the banks for a transitional period and against wiping out the shareholders of the banks that are in fact insolvent.
What that sounds like is that we’ll nationalize most of the banks because we have no choice. But we’ll allow the current management to run the nationalized banks and the current shareholders to own the nationalized banks.
What am I missing?
Blago will be making the closing argument in his own impeachment defense with a speech to the Illinois Senate this morning. That and the day’s other news in the TPMDC Morning Roundup.
Here’s what TPM Reader PS says I’m missing about the wisdom of the ‘bad bank’ model …
What you are missing is that the new “bad bank” structure that has been reported has a way to deal with the uncertainty surrounding the value of many of the suspect assets. The new bank will buy these assets at some estimate of current fair market value, but if the assets ultimately turn out to be worth less, then the new bank will receive common equity (not debt) in the existing banks, potentially massively diluting existing shareholders but not jeopardizing the soundness of the bank.
This proposed transaction thus achieves two things:
1) Uncertainty as to the capital sufficiency of existing banks will be much reduced. This has to achieved before robust bank lending can resume.
2) Nationalization gets postponed and may not ultimately prove necessary. If the assets transferred prove to be really bad, then the government may indeed end up as the majority holder in some banks. But this will occur many years down the road, in what can only hope will be calmer waters. If that is the case then the majority stake can be disposed of that that point.
So the key point here is that this structure finesses the current valuation of the bad assets. Nobody really knows what these assets are worth currently, but in a few years all will become clear.
TPM Reader IA responds to TPM Reader PS on the ‘bad bank’ idea …
PS’s claim that the model currently being proposed has a way of protecting taxpayers from over-paying for illiquid assets fails to consider that the current market price would do more than dilute existing shareholders. For many banks, it would wipe them out and force debt holders to absorb significant losses as well. So the idea of giving government an equity stake in an insolvent company in return for over-paying for toxic assets is really a gift to debt holders. (This is why Bill Gross is so positive on the plan.) Like shareholders, they knowingly took risks when investing in these companies in search of higher yields. Why should they not be forced to take a hit?
One point that might be worth considering. I’ve heard that a number of sovereign wealth funds — i.e., foreign governments who’ve invested big chunks of money — have put us on notice that they would not sit still for seeing their own assets wiped out in any global financial sector plan.
And TPM Reader TP follows up …
Reader PS assumes that banks aren’t lending because they have all of these assets of “uncertain value” on their books.
Krugman has already addressed this argument and the “folly” of the ‘Bad Bank’ that is ‘Bad’ for you (the taxpayer) and not-so-bad for the ‘Bank’ after all. As Krugman has pointed out, the problem is a “Zombie Bank” problem. There are doubts about the solvency of many banks. This means that the problem is that these banks can’t attract private capital (debt or equity) because investors and creditors fear throwing good money after bad. What PS describes is not a “sale” of these assets but the exchange of these assets for some type of warrant or future claim on equity. It’s pretty clear that these assets are not being carried at anywhere near expected value. If the Gov’t takes these assets in exchange for what is expected to be a large issuance of shares in the future (and the Gov’t must pay much more than what the banks think the assets are worth, otherwise there wouldn’t be any improvement to the capital base), wouldn’t it be difficult for these same banks to raise equity capital? Who wants to own Bank X at $4/share with the expectation that it will be massively diluted? Similarly, who would lend to this bank that can’t raise equity and whose ratings will remain uncertain until the Gov’t’s claims are known?
Meanwhile, business as usual for the bank managers and employees (the folks with whom Gheitner is most familiar). The bonus party goes on (see: Merrill Lynch, AIG) while the equity holders languish in uncertainty and the taxpayers pay the bill. Oh, btw, isn’t there another financial instrument that gives you cash now but may be converted to stock in the future? Doesn’t that instrument earn a pretty nice rate of interest (ask Mr. Buffett)? I don’t think we’ll be seeing that kind of return on the ‘Bad Bank,’ do you? That would be another taxpayer-funded subsidy.
This is an uncomplicated game of “hide the salami.” It may very well be appropriate for Obama and the Congressional Dems to bailout the poor judgement of Wall Street shareholders and employees, but we shouldn’t kid ourselves into thinking it will be anything but massively expensive to the taxpayer. The ‘wisdom’ isn’t hidden here, the bill is.
Coleman lawyer takes new stand for Coleman voter with forged absentee ballot application.