So far, we in the US have had an ad hoc, half-assed, on-the-fly approach to resolving the credit and financial crisis.
The smartest bailout approach to date has been the British/Swedish/Buffett approach: Inject capital at a corporate capital structure level by buying preferred stock, rather than at the balance sheet level by buying bad assets.
Now, we read that the Treasury is considering following these other, smarter approaches:
"Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials.
Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.
The Treasury plan was still preliminary and it was unclear how the process would work, but it appeared that it would be voluntary for banks.
The proposal resembles one announced on Wednesday in Britain. Under that plan, the British government would offer banks like the Royal Bank of Scotland, Barclays and HSBC Holdings up to $87 billion to shore up their capital in exchange for preference shares. It also would provide a guarantee of about $430 billion to help banks refinance debt."
Sure its a year late, and a trillion dollars short. Yes, this would have saved most of the firms that went belly up.
Better late than never . . .
UPDATE: October 9, 2008 2:18 pm
The way we have the government buys into a cop-any via prefereds is to match any private sector investment into banks on the same terms. So GE and Goldman Sachs get double the capital injection, and since Warren did it on those same terms, we know Uncle Sam isn’t getting ripped off.
If you cannot raise dollar one, Uncle Sam doesn’t waste any good money on you.
UPDATE 2: October 9, 2008 2:40 pm>
Greg Mankiw discusses a similar approach: How to Recapitalize the Financial System
5 Historical Economic Crises and the U.S. (February 09, 2008)
Global Financial Crises, Part II: Norway 1987 (February 10, 2008)
U.S. May Take Ownership Stake in Banks
EDMUND L. ANDREWS and MARK LANDLER
NYT, October 8, 2008
I’ve heard concerns from various traders and hedge fund managers over the past few weeks that the Lehamn Brothers (LEH) derivatives unwind has been what’s roiling markets.
Early October, Citi (C) credit
analyst Michael Hampden-Turner estimated there is $400bn of Lehman credit
derivatives that will be settled on Friday
Hence, some recent fear can now be attributed in part to jumbo losses caused by Lehman’s derivative unwind . . . with JPMorgan (JPM) being the biggest potential collateral damage . JPM has the biggest derivative exposure on the Street (I have no opinion on how this impacts them or on their derivative exposure).
Here is the FT:
"At the moment, participants can’t just extinguish credit derivatives contracts with Lehman, they can only offset them. That, in turn, puts pressure on some participants to buy more credit insurance and the cost of such contracts is rising.
Moreover, many counterparties to Lehman who believe it owes them money have joined the ranks of unsecured creditors. This increases the number of claimants and reduces the money available to bondholders and other creditors.
The exact amount of any claim is determined by the difference between the value of the collateral and the cost of replacing the contract. The cost has risen in line with fears about the health of financial institutions and the creditworthiness of counterparties."
While Fannie and Freddie CDS settled at between 91.5 and 99.9 cents on
the dollar., expectations are for Lehman to settle at 10 cent on the dollar — causing a few $100 billion in losses. The unwind comes Friday.
More details after the jump . . .
UPDATE: Octoer 9, 2008 11:08am
Wow, that was quick — the Dow flipped from plus 150 to minus 150 rather fast. . .
Lehman exposes faults in credit default swaps
By Henny Sender in New York
FT, October 7 2008 03:00 | Last updated: October 7 2008 03:00
As noted yesterday, we lowered our Dow target to 9,000. As we get closer to that, we start paying closer attention to contrary indicators.
Along those lines, a new tumblr blog, Sad Guys on Trading Floors, caught my eye.
Its funny and sad and poignant, but for our purposes, its a yet another in a list of contrary indicators that suggests things are getting overdone, and that sentiment is moving towards an extreme. A blog such as this could only be conceived of during times of extreme market stress.
As of today’s lows, the Dow has given up 5,004 points (14,198 to 9,194).
Note that this is not a precise timing signal, but it is an interesting anecdotal sign worth watching . . .
when he told me this was a limited edition iPhone.
I can’t add a caption to this that
could possibly make it any more hilarious.
Hat tip boingboing more photos after the jump . . .
Sad Guys on Trading Floors