I’m angry enough about the prospect of a stupidly conceived financial industry bailout that I wrote the following letter to my state Representative, Jackie Speier, as well as Senators Dianne Feinstein, Barbara Boxer, Barack Obama and John McCain. I would have sent a copy to Rep. Barney Frank as well, since he is playing a key role in the bailout, but his website doesn’t accept email from people outside of his district.
I urge you not to support any bailout deal that involves purchasing or insuring bad debt.
This is the wrong approach. It rewards financial mismanagement and creates a state-run market for bad debt (thus encouraging corruption and further mismanagement). Worst of all, it leaves U.S. taxpayers holding the bag for someone else’s mistakes.
And when the financial industry turns around, we’ll still be holding a bunch of bad debt, which we’ll be paying off for years.
Instead, I urge you to direct the $700 billion bailout towards purchasing preferred stock in the companies at risk.
This is the strategy used in the bailout of Fannie Mae and Freddie Mac, as well as that used by Warren Buffett in shoring up Goldman Sachs.
This approach will recapitalize the companies and give them the breathing room they need. And when they turn themselves around, the U.S. government will get its money back — or perhaps even turn a profit, as the Hong Kong government did in the late 1990s when it purchased preferred stock in Hang Seng Index composite companies, in order to forestall a market crisis.
I’m not the only one to hold this point of view. One of the most popular opinion articles on the Wall Street Journal web site right now is “The Public Deserves a Better Deal,” published Friday, Sept 26. It makes the same point: The Treasury should be purchasing preferred stock, not bad debt.
I am not opposed to a bailout of the financial industry. I am, however, opposed to a one-sided bailout that rewards financial mismanagement while providing no benefit to the American taxpayer.
San Mateo, California
Not with you on this one, Dylan.
I am a finance whiz, but I understand the main problem to be the death spiral of the value of mortgage-backed securities. With the new mark-to-market rules, the value of these securities just cannot stabilize without a buyer that is willing to pay a floor. At this point, no private institution has the ability to set the market floor for all the debt out there.
The Paulson plan sets out to do that. Now I believe the additional oversight and the ability for the government to get benefits from this bailout (thru warrants from participating institutions or interest that needs to be paid on the purchase) is prudent.
But I thinking the essential piece of the plan (for the government to be the stabilizing buyer) is sound.
Doh! I meant to say earlier that I am NOT a finance whiz. Blah.
The problem with the Paulson plan is that stabilizing the prices of mortgage-backed securities will last only as long as the $700 billion. I am guessing that is significantly less than the total amount of insufficiently collateralized mortgage-backed securities out there. What happens when the Treasury money runs out? The floor drops again, and all the securities that the government now owns are worth less than they paid for them.
On the other hand, if you use the same $700 billion to invest in the companies involved, they’ll have the capital they need to set their own price floors — or, more realistically, to write off the bad securities and be able to weather the fallout from that.
I’m totally in favor of a bailout. I just think the Paulson plan is a particularly stupid version of it.
I’m far from being a finance whiz myself, btw.
I don’t like the fact that there appears to be no real oversight as to where and how the money is being awarded. I don’t understand why the banks that are receiving bailout money are allowed to acquire other failing banks? Where’s my bailout…I think I’d like to buy some cheap real estate!
I am not opposed to a bailout of the financial industry. I am, however, opposed to a one-sided bailout that rewards financial mismanagement while providing no benefit to the American taxpayer. I am angry with that too.