Reverting to TARP
Joe Nocera’s excellent piece in today’s Times leaves out one important point about the failure of Paulson’s initial TARP plan: price. Has so much happened since October that we’ve forgotten that the price Bill Gross and others were putting on the banks’s toxic sludge was 65 cents on the dollar, even after Merrill had effectively priced it in the single digits?
Everywhere I’ve turned these last few weeks, I’ve heard variations of the same refrain. “The original Paulson plan had it right — they had to get the bad assets off the banks,” said Ronald J. Kruszewski, the chief executive of the investment firm of Stifel Nicolaus & Company. “Before you are going to get intelligent capitalists to invest their money in the banks, you have to get these landmines off their balance sheets,” said Brett Duval Fromson, the managing partner of the Margin of Safety Fund. “The reason things are frozen is that nobody knows if the banks are insolvent or not — thanks to the bad assets on their books,” said Henry F. Owsley of the Gordian Group, an investment bank that specializes in “distressed situations.”
“If they wanted to follow the R.T.C. script, they would come to the immediate conclusion that they have to get assets out of the banks, and establish a market clearing price,” said Tim Ryan, head of the Securities Industry and Financial Markets Association. The R.T.C., of course, was the Resolution Trust Corporation, which managed (and sold) the bad assets on the books of banks during the savings and loan crisis of the 1980s and 1990s. At the time, Mr. Ryan led the Office of Thrift Supervision, and helped direct the response to that crisis.
Nocera goes on to make an implicit argument that nationalization is not only inevitable but should accelerated. In other words, the only way for the original TARP plan to succeed, and make sense, is through a nationalization process that would avoid having to buy the toxic assets from the banks for a ridiculously inflated price.
Source:
First Bailout Formula Had It Right
JOE NOCERA
New York Times; January 24, 2009
http://www.nytimes.com/2009/01/24/business/24nocera.html
January 24th, 2009 at 4:47 pm
I guess Nocera’s argument was too implicit for me. I was left wondering if Nocera reads his own newspaper. The Times employs a Nobel Prize winning economist who has forcefully written about the problems with both TARP 1.0 and TARP 2.0beta. Nocera should at least have had a quote from him.
Paul Kasriel has a piece out on why one cannot apply the Swedish model to the current model. His reasons apply equally well to why one cannot simply apply the RTC model, i.e., this time it’s global. No single country can fix this. It will require coordinated international agreements and actions on the part of all the major players, most especially the US and China. Since at least some of these actions would be perceived domestically in each country as not necessarily in the short term national interest I’m not holding my breath.
January 24th, 2009 at 6:24 pm
Nocera and everyone else fail to appreciate that if you buy the paper at par, the taxpayer eats the loss and owns the bank as the quid pro quo. If we pay market, the bank takes a loss and becomes less solvent, and we end up owning the bank. Better to just let Sheila do her job, resolve the bank and sell to new investors. That in blunt terms is the solutions, but nobody in DC at the Fed and Treasury wants to risk another Lehman. The lack here is guts, not money. We can resolve Citi over a period of years and keep the loss rate for the FDIC minimized. But I am still expecting 2-3x RBC in terms of losses at C, so how do we not haircut the debt? This is why the Geithner nomination was not about taxes but whether the big banks continue to free ride on the rest of the industry and ultimate the taxpayer.
January 25th, 2009 at 8:18 am
The problem with outright nationalization is that reprivatization can be a long and expensive process, often taking many years. This was the experience in the UK during the Thatcher years. For this reason, partial privatization is a better option. The entity remains listed and must comply with all the statutory requirements for a listed entity regarding disclosure, etc. Anthony Fry of Evercore Partners cogently makes this case. He frequently guests hosts on CNBC’s Squawkbox Europe and was heavily involved in the Thatcher era privatizations