Friday, October 31, 2008

Let's Not Mince Words

I wanted to clarify one thing: some of the talking heads on TV keep saying that we (and by we, I mean, the US Taxpayer, under the influence of the US Government) are investing in the banks, not bailing them out. It's very easy to see that this is a completely ludicrous claim.
Several weeks ago, I posted about Greg Mankiw's plan of having the government invest alongside private investors. "This plan would solve the three problems. 1) The private sector rather than the government would weed out the zombie firms. 2) The private sector rather than the government would set the price. And 3) the private sector rather than the government would exercise corporate control." Of course, Paulson et all got it completely backwards, by setting the price themselves, and encouraging the investment of private capital alongside his investment! Why haven't we seen any private capital investing alongside the government? Cause they got a horrendous deal!
Let's get to the numbers: When Warren Buffett invested in Goldman Sachs, before the government bailout, he struck a deal where he bought preferred stock that paid a 10% dividend, and also received warrants (options) to buy stock equal to 100% of his investment. It was a nice return for Buffett. However, when the Treasury bailed out the banks, they got preferred stock that paid a 5% dividend, and warrants to buy stock equal to 15% of their investment. Thus, we clearly failed in point #2 above: Buffett set a price for us, and we still managed to "invest" at a price that offers a fraction of the return as the market rate he set. That's a bailout, not an investment, pure and simple.
Just this morning, Barclays, the second largest bank in the United Kingdom, announced that they'd received a major investment from a group of investors from the Middle East. Barclays will pay a 14% dividend on the preferred stock they are issuing as part of the deal! The investor group also received warrants to buy more stock.
We're also starting to see problems related to point #3 above: the government bought non-voting shares, yet they think they have a say in how to run the companies! This is especially problematic because the government blundered when it tried to bailout the banking system and the stock market at the same time: instead of standing ready to take over firms that had dire liquidity issues, (as they did with FNM, FRE, AIG) the government tried to maintain stock values by NOT diluting common stock holders. They also didn't want to spook the investors in the banks by having government capital injections be a sign that the banks were in trouble, so they foisted the money on a wide swath of the major banks - such that no bank could decline the capital.
I don't think it's a great secret that I'm a free market capitalist. I'm not wholly opposed to regulation or government intervention, but I am strenuously against trying to have it both ways. If the government wants to legislate the policies of what the banks do with the money they receive, then they should buy the common equity of the banks and use the votes that come with such stock. Privatize the business and have the government run them. Otherwise, Barney Frank should keep his thoughts about compensation to himself, and Henry Waxman's oversight committee has no business commenting on or questioning the compensation structures of the big banks.
Now, on to Halloween: a shout out to the commenter who correctly guesses which costume I will see the highest frequency of tonight in NYC:
Male costumes: Pimp, G.W. Bush, Michael Phelps, out of work Wall Street employee
Female costumes: slutty nurse, slutty cop, slutty firewoman, slutty catwoman, slut

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