Bail Out Starts to Morph Into Buy Out

JeffB · Oct 13, 2008

So now Paulson is setting aside $250 billion for the equity stake plan. Props to Gordon Brown of the UK for leading the way.

U.S. to debut rescue

Treasury expected to announce $250B investment and backing bank debt.

By Tami Luhby, CNNMoney.com senior writer
Last Updated: October 13, 2008: 7:16 PM ET
NEW YORK (CNNMoney.com) -- The Bush administration will unveil Tuesday sweeping measures to shore up the nation's financial system and restore confidence in it.

Using authority granted in the $700 billion bailout bill, the Treasury would invest as much as $250 billion in banks, according to a person briefed on the proposal. The plan also calls for the FDIC to back up senior bank debt for three years - a move that would strengthen banks' financial footing.

One senior Democratic congressional source said Treasury Secretary Henry Paulson called House Speaker Nancy Pelosi, D-Calif., on Monday about moving forward with the bailout effort. "They [Treasury] did talk about going forward tomorrow to start buying up some of the bad assets."

President Bush will meet with his working group on financial markets at 7:30 a.m. ET and make a statement at 8:05 a.m.

Then Paulson will lead a group of officials making the announcement at 8:30 a.m. Paulson, Federal Reserve Chairman Ben Bernanke, FDIC Chairwoman Sheila Bair and SEC Chairman Christopher Cox are among the officials expected to attend.

The government may also temporarily guarantee lending between banks, a crucial function that provides businesses with funding for daily operations, according to an online report by the Wall Street Journal. This credit market essentially seized up after the collapse of Lehman Brothers, which sparked widespread fear about the viability of financial institutions around the world.

The plan mirrors steps taken by European nations early Monday.

If enacted the moves would go beyond even the framework outlined by a top Treasury official Monday morning. He spoke of the administration's original proposal to buy troubled mortgage-backed securities, as well as buying mortgages, insuring mortgages and mortgage-backed securities, helping delinquent homeowners and buying stakes in banks.

While top officials from the president on down have given speeches in recent days on the bailout efforts, they haven't provided many details on exactly how the government plans to stabilize and restore trust in the country's financial system.

But at least one thing is clear, experts said. The administration is trying everything, hoping that something will work.

Federal officials, who until a month ago did their best to limit involvement in the private sector, is now coming out with one new program after another in a frantic attempt to ease the credit crisis gripping the world.

"They are clearly just making it up as they are going along," said Lawrence White, an economics professor at New York University's Stern School of Business. "They don't have a clear and focused strategy."
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Meanwhile, the bulls are raging as the Dow, NASDAQ and S&P soar up 11% on the day....

Invisible Fan · Oct 13, 2008

I wish it was more than 250 billion devoted in equity stakes, but corporate executives have mouths to feed and mistresses to support!

JeffB · Oct 13, 2008

As with any plan, the devil is in the details... We have yet to know by what principles the Treasury will decide which banks to take equity in, what percentage ownership stake the Treasury is aiming for, and what the standard operating will be once the feds take partial ownership. Naked Capitalism is chiming in on what they see so far:

This would not be as bad as Shedlock suggests IF there was also, as in the best-practices model of Sweden, some punitive elements (getting rid of incumbent management, wiping out shareholders, nationalizing banks, which in the Swedish case enabled the taxpayer to profit) and a plan to rationalize (as in shrink in an orderly fashion) the industry. Instead, the Treasury appears to be trying to prop up the industry in place. That is not likely to be a winning formula.

http://www.nakedcapitalism.com/2008/10/wsj-provides-sneak-preview-of-treasury.html
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And regarding the stories that the Treasury is forcing certain banks to accept an equity deal:

Lordie, do we have any rule of law in this country? Presumably, the twisted logic of forcing money on to bank in return for taking perpetual preferred was that making the banks ask for it would create a taint. But even with the Treasury's sweeping new powers under the $700 billion rescue package, one wonders how it compelled banks to cooperate. The process by which this was done is alarming.

But here we go, virtually no restrictions (the Bloomberg article mentions executive comp limits, but given Paulson's stance, expect this to be cosmetic), no (a la Sweden) having a disciplined process to figure out who was worth salvaging and concentrating rescue dollars on them, and having a strategy (consolidation, liquidation, spinning bad assets off into an Resolution Trust type "bad bank" vehicle) for the ones that didn't make the cut.

The Swedish government showed a profit by taking deliberate action. Throwing money at a dartboard isn't likely to produce good outcomes.

http://www.nakedcapitalism.com/2008/10/bloomberg-treasury-forces-nine-banks-to.html
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I want a bailout built around equity positions, but I want a Warren Buffet deal, not some "just helping out my buddies, over here" deal.

Invisible Fan · Oct 13, 2008

It'll likely be executed in a manner where taxpayers will not get anything in their best interests.

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