Saturday, October 11, 2008

Toxic Debt Purchase Morphs into Bank Nationalization
The Credit Crisis keeps getting wilder. Here is a must-read from tomorrow's New York Times. I won't re-hash it, but the idea of buying mortgage securities is now secondary to the Government investing directly in banks. This is so radical I don't even have an opinion, other than if it stops a depression it is probably a good idea. I do think it's a Hotel California-type investment - easy to get in but hard to get out - that may be good for the immediate-term but the long-term implication is open for debate.

Here are a couple of parts of the article that stood out to me:

Two weeks after persuading Congress to let it spend $700 billion to buy distressed securities tied to mortgages, the Bush administration has put that idea aside in favor of a new approach that would have the government inject capital directly into the nation’s banks — in effect, partially nationalizing the industry.

As recently as Sept. 23, senior officials had publicly derided proposals by Democrats to have the government take ownership stakes in banks.

The Treasury Department’s surprising turnaround on the issue of buying stock in banks, which has now become its primary focus, has raised questions about whether the administration squandered valuable time in trying to sell Congress on a plan that officials had failed to think through in advance.

I think that the Credit Crisis is moving so fast, that the nuclear option of nationalizing banks was far down Paulson's list of options.

Here is a funny blurb that is full of irony:

Treasury officials began canvassing banks and investment firms about the possibility of having the government buy stakes in them. The new bailout law gave the Treasury the authority to buy up almost any kind of asset it wanted, including stock or preferred shares in banks.

Industry executives quickly told Mr. Paulson that they liked the idea, though they warned that the Treasury should not try to squeeze out existing shareholders. They also begged Mr. Paulson not to impose tough restrictions on executive pay and golden-parachute deals for executives who are fired.

Mr. Paulson heeded those pleas. In his remarks on Friday, he carefully noted that the government would acquire only “nonvoting” shares in companies. And officials said the law lets the Treasury write most of its own restrictions on executive pay, and those restrictions can be lenient if they are applied to a set of fairly healthy companies.

At this point, beggars can't be choosers. First, many executives will probably get fired, like at Freddie Mac, Fannie Mae and AIG, and get a nominal severance package. Second, executives that don't get fired should be happy to get any compensation. They only need to look what happened to executives at Bear, Lehman and AIG who lost most everything. Heck, if the plan works and confidence is is restored, banks will be able to retire the preferred stock or other Government investment and then pay themselves a huge bonus for management expertise during the Credit Crisis.

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