Hullabaloo

Saturday, October 11, 2008

 
Hey Kids, Let's (Pretend To) Buy A Bank

by dday

There was a ridiculous amount of news for a Friday night, the foremost being that President Paulson is finally giving in and doing what should have been done in the first place, purchasing an equity stake in failing banks. The problem is that he is still doing it wrong.

WASHINGTON - Treasury Secretary Henry Paulson said Friday that the Bush administration will move ahead with a plan to buy stock in financial institutions.

Paulson said the program to purchase stock in financial institutions will be open to a broad array of institutions.

The administration received the authority to make direct purchases of stock in banks in the $700 billion measure Congress passed last week to rescue the nation’s financial system [...]

Paulson said the government’s program would be designed to complement the efforts of banks to raise fresh capital from private sources. He said that the government’s stock purchases would be of nonvoting shares so that the government will not have power to run the companies.

Actually, we need the power to run the companies, or at least tell the bankers what to do, more specifically that they must lend to one another. They aren't the kind of shares that Warren Buffett got from Goldman Sachs. If this doesn't change bank behavior then it essentially will do nothing. A bank that refuses to lend is not a functional bank, and the government ought to take it over. As Krugman says, this is a half-Gordon - referring to Gordon Brown's recapitalization plan (not the part about suing Iceland).

Worse, the G7 finance ministers aren't coordinating their efforts.

Oct. 10 (Bloomberg) -- Finance ministers and central bankers from the Group of Seven nations signaled reluctance to adopt a coordinated effort to shore up banks, risking a deeper crisis of confidence after this week's crash in global stock markets.

As equities worldwide suffered their worst week since the 1970s, officials gathering in Washington said they were seeking new ways to stem the meltdown. Still, they argued that tailoring efforts to the needs of individual nations was better than a cross-border plan.

The G-7 is considering including in its statement saying that no bank of systemic importance will be allowed to fail, and may outline principles all nations should follow, two European officials told reporters in Washington. Still, the group is unlikely today to endorse a U.K.-style commitment to guarantee loans between banks, an official from a G-7 member said.

AND, it appears that Paulson is going to use Fannie and Freddie to kickstart the buy-up of troubled assets, essentially widening the money pool:

Federal regulators directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month of underperforming mortgage bonds as the Bush administration expands its options to buy troubled financial assets and resuscitate the U.S. economy, according to three people briefed about the plan.

Fannie and Freddie began notifying bond traders last week that each company needs to buy $20 billion a month in mostly subprime, Alt-A and non-performing prime mortgage securities, according to the people, who asked not to be identified because the plans are confidential. The purchases would be separate from the U.S. Treasury's $700 billion Troubled Asset Relief Program.

Because the $700 billion is going to go to recapitalization, yet he has to reward his banker friends by overpaying for their trash.

AND, GM is talking merger with Chrysler, just weeks after securing a $25 billion dollar loan from the Feds.

These are just the economic Friday news dumps. (we're also taking North Korea off the terror watch list and agreeing to a timeline for withdrawal in Iraq, you know, little things like that)

And they worry me. Paulson is still trying to work a heist instead of fix the fundamentals. And the market has thus far responded very poorly to heists.


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dday 10/11/2008 11:00:00 AM |