Well, today is supposed to be the big day for the announcement of the “bailout”. What’s really very interesting about the process this week is that there are no real detail of what the main points of disagreement are. This is as it should be. Any leak of the details of the discussions would have an immediate impact on markets. Nevertheless, here are some thoughts.
Nevertheless, it would be interesting to know what the key points of disagreement are. I’m guessing it’s the structure of the deal but I’m looking at it from the private sector point of view. I think some politicos want to look at it on a bank-by-bank basis while others want to look at it on an “asset class” basis. The more efficient solution IMHO is to look at it on an asset class basis. Looking at things on an asset class basis would make it easier to try and value the paper (not to imply that it will be easy to put a value on the paper).
I’m also guessing that a major point of contention is the compensation (year-end bonus)to executives of the firms. To me this is a no-brainer. No bonuses, options, deferred compensation, pension infustions, in a word, nothing. Bonuses are supposed to be paid for performance, not for “we didn’t have as bad as year as some other guys”.
I watched quite a bit of the Paulson/Bernanke testimony earlier in the week. The Senate does not inspire confidence. Paulson had to explain “reverse auctions” at least five times to different Senators. If they can’t understand this simple concepts, how are they going understand what will be a fairly complex financial structure? Honestly, some of the Senators can’t tell a balance sheet from a bedsheet.
One thing that struck me during the hearings was how politicos view the world. The Senators seemed to be looking for “one-size fits all” perfect solution. Paulson kept trying to explain this is not how things work. In essence, Paulson kept saying “the market is where you do the deal”. Also, where you do the deal is not necessarily the best deal. But it’s a start, especially in the case where the assets are composed of many little assets i.e. mortgages, derivatives and synthetics that became a part of the problem.
I’m guessing the “structure” of the “bailout” is also an issue. I blogged about the structure I think they could and should copy.
I still think that’s the way to go since the profits will go back to the fund. I would add the caveat that the private sector be allowed to get in on these deals. There will be some bargains when the funds are dispersed (assuming there is a market to component to the funds injections) and the private sector should be allowed to compete. After all, the trick in all of this will be to try and figure out the value of the paper the “super fund” will be buying. If the government values it at say $00.20 and a private sector firm values the same asset at say, $00.24, then the private firm would step in when the reverse auction hits say, $00.22. This would be less money committed by the “super fund”. At the same time, the superfund would have to step up on the “toxic assets” (loosely defined as assets that have no liquidity) even if that price is only at say, $00.005.
Remember, that just because an asset is illiquid, doesn’t mean it doesn’t have value. It may only be $00.005/$1.00 but it does have some value. Also, if that asset gets to say, $00.03/$1.00, you have a nice profit on your hands. Natually, that profit goes back to the taxpayers. Actually, it won’t go to the taxpayers, Congress will figure out a way to spend it.
Congress and the Executive Branch look, from appearances anyway, to be working on a way to get something on the table. If there’s a market and profit component to the final structure, it may actually work.
Edit: One other thing. The final package must include the dismissal, desolution, whatever of the “Fair Housing Act”. Also, all mortgage underwriters must hold those mortgages for at least five years. More stuff I’d like to see included here.
