Skip to comments.Mort Zuckerman: The right way to save the economy
Posted on 10/02/2008 2:35:09 PM PDT by 2ndDivisionVet
In the boom years the financial world, which we call Wall Street, reaped rewards to satisfy King Midas. In just one recent year, 2006, its firms paid out an astonishing $62 billion in bonuses (no, this is not a typo).
The "masters of the universe" created not one bubble, but two: a housing bubble and then a credit bubble, and now that both have burst we face a growing danger of a global financial panic. Every day that passes without a remedy multiplies the risk of a complete freeze up of the financial and credit markets. This threatens a crash of horrible consequences.
But the insistent question in the public mind, one to answer before looking for an exit strategy, is how we got into this potentially lethal maze.
First, housing. People with no credit score were enabled to buy homes with no money down and to buy ridiculously overpriced homes. How come? Congressmen won votes pressing for "affordable housing" for everyone and community organizers were eager to get on the bandwagon. Congressmen of both parties protected the two biggest mortgage agencies, Freddie Mac and Fannie Mae, from having to find more capital. Everyone assumed houses would go on appreciating way beyond the value of any collateral, so that somehow it would all work out.
Home values appreciated from 2002 to 2006 at the extraordinary rate of 16% a year, compared to 3% per year on average from 1945 to 2000, to the point where it became impossible for the typical family to buy an average price house using a conventional 30-year mortgage. House prices started falling, diminishing the value of the mortgages and in turn the value of the mortgage-backed security bundles, which were based on the assumption that their housing prices would not go down.
The essential ingredient in the world of finance is confidence. Everything rests on that - and it evaporated. Without confidence, the markets stop functioning. Stock prices of financial firms plummeted, especially those that were massively leveraged with excessive debt.
Even worse was the run on money market funds after one of them announced they were going to give investors less than 100 cents on each dollar invested. This, in turn, shrunk the commercial paper market and provoked a sharp rise in the base mark lending rate that affects us all.
The Treasury Department's solution to this crisis had many, many problems. The idea was to buy depressed mortgage securities and other illiquid, even toxic assets. But how to figure out what to pay for assets that are so complex, so uncertain in value, and when many of them remain overvalued on the books of financial institutions?
The likelihood is that the government will buy them at an above-market price and thus provide a huge unjustified bailout of Wall Street. On the other hand, if they buy them at market prices, financial firms might have to take enormous writeoffs that would damage their balance sheets and force them to seek billions more in private equity capital that might not be available. Meanwhile the average American who is forced to sell their home must do so at market prices.
The average American saw the government as purchasing the bad loans taken on by a reckless and greedy financial sector, transferring billions of taxpayer dollars to these very shareholders and management whose excesses created the crisis.
The antagonism to this perceived undeserved windfall collapsed the bipartisan support for the plan and it was rejected by the House of Representatives.
But stabilizing the financial markets is imperative. The real issue is who should bear the cost. It should not be the taxpayer.
There's an alternative to buying the bad loans and investments. This would be to invest public funds in these financial institutions through the purchase of prior preferred stock by the government, which would put them senior to all shareholders. Preferred shareholders, namely the public, would be the last to realize losses and the first to receive gains. This would still recapitalize the banking system and give them time to dispose of their bad assets in an orderly fashion.
It's this same approach that Warren Buffett adopted when he invested $5 billion in Goldman Sachs. So why should the public get a worse deal when they are asked to use their dollars to be invested in lesser quality financial institutions, which have a higher risk?
The first description of the plan as a bailout was right; it would bail them out of their mistakes and pay a reward for failure. If there were profits to be made from spending money to shore up the banking system, it should be made by the taxpayers, and not just by the political and financial elites who created this mess.
That is why Americans have been furious at these proposals, as they had every right to be. Congress should come up with an alternative plan of the kind mooted here. Wall Street must be seen to bear responsibility for flawed business decisions.
Congress should get it right the second time around - and get it right quickly.
Yep. Too late. It’s a done deal tomorrow.
American public had every right to be furious at these proposals............I liked that.
Maybe, but 30 days before a national election?
This would be to invest public funds in these financial institutions through the purchase of prior preferred stock by the government
that’s also socialism
American public had every right to be furious at these proposals
But instead of “had”; it ought to be “has” every right to be furious....
The NY Daily News also supports Obama.
AMEN! ‘nuff said
Congress has a magnificent capability of turning even a reasonable idea into cr*p. That’s why the ‘hands off’ approach is best, Govt can never manage this without mucking something up. It’s a smarter deal in some ways, but then makes the Govt owner of banks. Nationalized banking anyone?
Govt shouldnt be owning any bank except ones that otherwise went insolvent. The signing off of banks to other healthy banks is a superior way to go, if it can be done, but Paulson’s plan is second best. It puts the Govt in charge of assets, not banks, and as a result, the rest of the financial industry, the healthy part, is left standing.
Keep injecting that Fed liquidity until the state of shock recedes, get the Govt to buy up the distressed toxic assets, and then do your darndest to get the Govt out of the way.
Washington isn't taking over Wall Street. Wall Street is taking over Washington (I know, they're far down that road already. This just seals the deal).
Now, every time Wall Street gets in trouble, they'll demand another bailout, and Washington will have to give it to them, because the precedent has been set, and if Washington refuses, the big banks will hold back credit as a form of ransom, and people like Henry Paulson will talk down the market and create a panic.
Just watch. In six months, Paulson will be back, saying that the $700 billion wasn't enough, and he'll demand maybe another $400 billion. They'll have to give in, without even the token resistance that we saw on Monday. The precedent has been set, and the elected representatives of the nation no longer run the show.
The Washington political class is too corrupt and incompetent and afraid to face this, but they know what's going on just as well as I do.
Does this scenario appeal to anyone? It's true.
Socialism is the government ownership of the means of productions.
These companies that we would hope to bail out don't produce squat!
Therefore it is technically not socialism.
>>>through the purchase of prior preferred stock by the government, which would put them senior to all shareholders. Preferred shareholders, namely the public, would be the last to realize losses and the first to receive gains.
The new money should be senior to equity AND also senior to the bondholders. Zuckerman is not saying this. He’s just saying senior to equity. The current bondholders should take a haircut and/or stand behind the new money.
This change to Zuckerman’s recommendation would mean all existing debt holders subordinate their debt to the government’s preferreds.
If there is to be an unconstitutional government bailout, then this change would make it better.
Take it off their hands at zero. Later give them 10-18% after expences.
“Take it off their hands at zero. “
There would be no offers and it wouldnt help ease frozen credit.
“Later give them 10-18% after expences.”
Actually, I had similar idea a few weeks back. Have Govt buy it ‘on consignment’ as a ‘workout’.
Financially speaking, the insurance idea (Cantor) is similar but less intrusive and simpler. Just insure the downside on these products based on underlying value, and the insurance itself can be costed out so its a no-cost bailout. Like the FDIC but extended further.
Why not use the bailout money to pour more liquidity into the commercial banks to make sure they can honor deposits, make loans and re-negotiate or foreclose and sell the bad mortgages? That way main street is protected and the specultators take their lumps.