KRUGMAN: "No equity stake, no deal."

[kpete]

KRUGMAN: "No equity stake, no deal."

September 23, 2008, 1:03 pm
Getting real — and letting the cat out of the bag

Whoa — it seems that Ben Bernanke ditched his prepared testimony and, instead, let the cat at least partly out of the bag.

I believe that under the Treasury program, auctions and other mechanisms could be devised that will give the market good information on what the hold-to-maturity price is for a large class of mortgage-related assets. If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.

First, banks will have a basis for valuing those assets and will not have to use fire sale prices. Their capital will not be unreasonably marked down …

...................

As I wrote earlier this morning, the whole "take these assets off the balance sheets" line is fundamentally disingenuous; the key question is what price Treasury pays for the assets. And here we have Bernanke effectively saying that it’s going to pay above-market prices — prices that allegedly reflect "hold-to-maturity" value, but still more than private investors are willing to pay.

This should be read in the context of Brad Setser’s calculations: he finds that if Treasury pays a price that seems appropriate given the poor quality of the assets, "The hit to the banks balance sheet might be too big" — the losses would be much larger than the amounts banks have already acknowledged, so that their capital position would be severely weakened.

So the plan only helps the financial situation if Treasury pays prices well above market — that is, if it is in effect injecting capital into financial firms, at taxpayers’ expense.

What possible justification can there be for doing this without acquiring an equity stake?

No equity stake, no deal.


http://krugman.blogs.nytimes.com/2008/09/23/getting-real/

[TexasObserver]

1. The deal should be 90% ownership of all companies "helped."

Which ownership is to be sold through open bidding, later, when Democrats are in power and can make sure it is done legitimately.

These failing companies should get almost NO upside. Their benefit is staying in business and not losing 100% of their ownership.

[Nikki Stone1]

7. Yes.

"above-market prices "

That's just ridiculous with no equity.

[Klukie]

2. So how many shares do we get?

Americans should demand a stake.

[JDPriestly]

3. They plan to buy second mortgages, second liens.

That paper is not even worth a few cents on the dollar. The first mortgage has the right to foreclose first. The second mortgage holder has nothing unless the holder of the second mortgage jumps in and forecloses first. This is a give-away to the rich.

I will not vote for Democrats in November if Democrats vote for this give-away to the rich. Let these wealthy people fall on their swords. That's what they deserve. Those of us with money in pension funds can at least get a tiny bit of the proceeds of the stockholder suits that will follow if they do fold.

Let the courts do their work. Let the economy recover without intervention. It will recover, you know.

What this proposal is really about is foreclosing any opportunity to change the balance of power and the culture of D.C. This proposal if made into law will bind the next administration to obligations that the country, ordinary people in the country cannot take care of.

This proposal is a huge swindle brought to us by the same guys that caused the problems in the first place. I'd like to know what kinds of houses Bernanke and Paulson live in and how many they own. That is what the American people need to know right now.

The rich should put their own money on the line, not ours.

[BonnieJW]

4. Krugman

Should be appointed to oversee this bailout. He's the only one with the knowledge and without any ties to big business.

[Pastiche423]

10. I just said the same thing to a friend a few hours ago

before I read this article.

[redqueen]

5. Call congress. Tell them, "No equity stake, no deal." It's OUR money!

1 (800) 828 - 0498
1 (800) 614 - 2803
1 (866) 340 - 9281
1 (866) 338 - 1015
1 (877) 851 - 6437
1 (800) 459 - 1887

Please, call... and tell them.

Repeatedly.


And also, please pass it on.

:kick:

[Jeanette in FL]

15. Call them again and again

Absolutely.

"No equity stake, no deal". That should be our collective mantra.

We need to keep the pressure on our "elected" leaders.

[redqueen]

16. Yes... keep up the pressure, and intensify it every day!

:kick:

[LittleBlue]

6. No bail out

Not ever. This is disgusting. The dollar is currency, not cocaine for addicts.

[Raster]

8. Kick for Krugman!

Wake Up, America!:kick:We Can Do Better!

[Monk06]

9. No wonder the Korean's said no thanks to the Lehman Bros buyout. Talk about cheek

How is it even possible to buy debt without equity?

Equity or securities are just a purchase contract.

What you purchase when you buy company shares is
to total wealth of the company which in the final
analysis is the NAV. Total Assets - Total Liabilities

NAV may be negative if the company is insolvent but
you can't buy company debt without an equity purchase.

The government should be getting a better than 50% share
of both common and preferred shares in these companies
for $700 Billion. IF not then the offending companies
can vote themselves back on the BODs and be back in the
drivers seat.

It's like the Cops giving a drunk his car keys back and
telling him to drive safely.

[Canuckistanian]

11. So basically, the banks are going to profit from this?

This isn't just a case of compensating banks for losses.

This is giving them MORE than they need based on TRUE prices?

[redqueen]

12. Yes, that's why they stressed the need to do it so quickly and in such alarmist terms.

They wanted to pull another PATRIOT act.

[Romulox]

19. Yep. If the financials could be "saved" by selling MBS at market rates, they'd do so.

The reason the government is purchasing these MBS is that there is no willing buyer for them at any price. By definition, they are worthless on the open market.

[nadinbrzezinski]

13. After readyng Dodd's plan the equity section of his bill

has to be expanded and clarified

Oh and expect the usual suspsects to scream foul

[Romulox]

20. Apparently Chris Dodd is the #1 recipient of Fannie/Freddie PAC money. :) nt

[OakCliffDem]

14. K & R

[muriel_volestrangler]

17. Use that auction mechanism to get private firms to buy the assets, instead

Bernanke said:

I believe that under the Treasury program, auctions and other mechanisms could be devised that will give the market good information on what the hold-to-maturity price is for a large class of mortgage-related assets. If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.

First, banks will have a basis for valuing those assets and will not have to use fire sale prices. Their capital will not be unreasonably marked down …

Fine. If the problem is that banks are having trouble valuing their assets, then get this "good information on what the hold-to-maturity price is for a large class of mortgage-related assets" to the market, and then the players in the market will buy them. Why have the government buy them at all? All the government needs to do is set up the auction - a small bit of work, and you don't then need to get the government into the mortgage-holding business (any more than it already is with Fannie Mae and Freddie Mac).

[redqueen]

18. There's almost no chance they would.

Perhaps no chance at all.

It would be nice... and Warren Buffet's investment is encouraging...

[Romulox]

21. There is no trouble valuing these assets.

Any first year economics major can tell you that the "hold to maturity price" is not the same as the present value of an asset.

An asset must be discounted to account for the amount of return that could be earned on the money used to buy if it were invested in an alternative area, as well as the risk that the asset will produce less than expected. Which is why banks charge interest for loans. The "hold to maturity price" is therefore not the present value of the MBS.

In other words, there is no problem valuing these MBS in the least; the value the market has assigned, given the risk, is something close to zero.

[redqueen]

22. ...

:kick:

[sonias]

23. Krugman is right again - no equity stake, no deal

No bailout, no way, no how - just say no to Ben Bernanke and no Henry Paulson Jr. Both of them are liars trained by the bushies.

Sonia