Fixing The Mess
Noriel Roubini has a transcript of a colloquy between Barney Frank and Jim Moran that effectively informed the Treasury Department that they could go the route of partially nationalizing the banks instead of their craptacular troubled asset buy-up program:
At first, Congressional aides we contacted were confused on whether the wording in the legislation did allow such public recapitalization was permitted or not. They pointed out to us that several sections of the legislation could be interpreted as allowing such public capital injection. Specifically such senior Congressional aides argued that several sections of the bill could be used to argue that the purchased “assets” as used in these provision would include not only securities accounted for as assets on the balance sheet of the financial institution but would also include common and preferred share, warrants on common and preferred shares, as well as secured and unsecured and convertible debt in the financial institution itself, which would be accounted for as assets on the balance sheet of the US Treasury [...]
But we pointed out that this interpretation of “assets” as including preferred shares, left to itself, was a real stretch of the meaning of the legislation as preferred shares and common shares and sub debt are liabilities – rather than assets – of the bank. Thus, it was important to clarify that "any other financial instrument" was not limited to assets but also included institution’s liabilities such as stock, preferred stock, subordinated debt, senior debt.
In other terms it was necessary to explicitly clarify that the definition of “assets” or “any other financial instrument” in the legislation did allow for such public injection of capital so as to ensure that the regulations following the legislation would allow for such interpretation and actual practice. Since it was too late – by Wednesday last week - to explicitly modify the legislation to allow for explicit wording on this matter and since Treasury was resisting such late explicit changes (that would have jolted the banking industry) the tool that was used (in full agreement with the House and Senate leadership) to allow for such interpretation was to have Representative Jim Moran use the October 3rd House floor debate right before the final vote to put on the legislative record such interpretation. See the following important exchange between Jim Moran and Barney Frank that is now on the legislative record of the House:
Mr. MORAN of Virginia. Thank you, Madam Speaker. I won't take that much time. I do want to thank the chairman for his masterful leadership on this bill, and I do want to clarify that the intent of this legislation is to authorize the Treasury Department to strengthen credit markets by infusing capital into weak institutions in two ways: By buying their stock, debt, or other capital instruments; and, two, by purchasing bad assets from the institutions, in coordination with existing regulatory agencies and their responsibilities under this legislation, as well as under already existing authorization for prompt, corrective action and leastcost resolution.
Mr. FRANK of Massachusetts. Will the gentleman yield?
Mr. MORAN of Virginia. I'd be happy to yield.
Mr. FRANK of Massachusetts. I can affirm that. As the gentleman knows, the Treasury Department is in agreement with this, and we should be clear, this is one of the things that this House and the Senate added to the bill, the authority to buy equity. It is not simply buying up the assets, it is to buy equity, and to buy equity in a way that the Federal Government will able to benefit if there is an appreciation.
So Moran asks Frank to clarify that the explicit intent of the legislation is to allow the purchase of bank liabilities (stock, debt, or other capital instruments) not just assets; and Frank replies firmly that this is the case and that Treasury agrees with such interpretation. Done!
I know that there's this knee-jerk response that we're supposed to de facto assume that Democrats cave and aren't worth a warm bucket of spit, but they appear to have back-doored the right idea on this crisis. And this is what must be done. Nationalizing the banks is the best way to both shore up the system and get the best deal for taxpayers. It may not what you'd want to do in a sustainable economy, but it's the hand we've been dealt. And nobody's going to argue with it. Hell, The Wall Street Journal is arguing in favor of this move.
The fact that the Treasury Department came to this realization now is helpful for a potential Obama Administration. He's still going to inherit one heck of a mess, but at least the plan is in action and may be in motion.