Economics

Government to Buy Equity Stakes in Crappy Banks

|

From the AP, the follow-through on the big bailout bill:

An administration official, who spoke on condition of anonymity because no decision has been made, said the $700 billion rescue package passed by Congress last week allows the Treasury Department to inject fresh capital into financial institutions and get ownership shares in return.

This official said all the new powers granted in the legislation were being considered as the administration seeks to deal with a serious credit crisis that has caused the biggest upheavals on Wall Street in seven decades and continues to roil global markets.

Supporters of this approach, such as Sen. Charles Schumer, D-N.Y., argue that injecting fresh capital into U.S. banks who want to participate in the program would be an effective way to bolster banks' balance sheets and get them to resume lending. Taxpayers would benefit because the government would receive an equity stake in the bank in return for providing the capital.

"This idea would, at a minimum, complement the administration's planned approach of buying up troubled assets and may prove to be the most promising tool of all in Secretary Paulson's kit," Schumer said in a statement.

More here.

It is not clear what "the biggest upheavals on Wall Street in seven decades" means exactly. Certainly it's the biggest bailout, which is not quite the same thing.

Look for the semi-socialization of the nation's financial sector to be George W. Bush's legacy project over the few remaining weeks (thank God) of his presidency (whatever happened to the political capital he was gonna spend on privatizing Social Security? Guess he lost it in a poker game or a war or something). And somehow, if Bush has his way, maybe we the taxpayers will get big steaming piles of equity in a bunch of dying car makers and airlines too.

It didn't have to be this way. Here's reason on "building a better bailout" and here's economist and author Russell Roberts on just how bad the bailout is:

And here's reason's coverage of the bailout en toto.

NEXT: Now Playing at Reason.tv: Get Some!—How to Solve America's Health Care Crisis

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. Yeah, I’m over this already. I can’t read the word bailout again, it’s lost all meaning.
    So, here’s Bob Barr getting an hon mention in the 2008 American Moustache Of The Year awards…
    http://www.athlists.com/?p=102

  2. Supporters…such as Sen. Charles Schumer, D-N.Y.,…

    The most ironclad de facto condemnation on any enterprise I’ve ever seen.

    …George W. Bush’s…few remaining weeks (thank God) of his presidency…

    Yes, if only someone better would be taking his place. I’m to the point of skipping this election and locking him in the White House for four more years.

  3. Thank GOD so much tax money was spent going after e-gold & the Liberty Dollar!!

  4. It is not clear what “the biggest upheavals on Wall Street in seven decades” means exactly.

    It’s not?

    This magazine is like Kevin Bacon at the end of Animal House sometimes.

  5. joe, mockery doesn’t count as an argument. There have been much larger percentage declines on Wall St during the past seven decades. It’s not clear what makes these troubles worse than the previous ones, besides the fact that it’s happening “RIGHT NOW!!!!!!!!!!!”

    It’s sort of like those Top 10 lists that rate “Heroes” as the #1 Sci-Fi show of all time.

  6. Given that this is going to happen, there are worse ways the government could do it than the way proposed by Greg Mankiw

    It could work as follows. Whenever any financial institution attracts new private capital in an arms-length transaction, it can access an equal amount of public capital. The taxpayer would get the same terms as the private investor. The only difference is that government’s shares would be nonvoting until the government sold the shares at a later date.

    This plan would solve the three problems. The private sector rather than the government would weed out the zombie firms. The private sector rather than the government would set the price. And the private sector rather than the government would exercise corporate control.

  7. And I read this morning that Pelosi wants to throw out another 150m “stimulus package” for our ailing economy.

    It’s going to be “The Great Depression II: Electric Boogaloo” by the time these assholes get done.

  8. The Great Depression II: Electric Boogaloo

    And they wont blame their actions for causing it. Sigh. We were only trying to help!!!

    Personally, why I generally think all sequels should have Electric Boogaloo tagged on the end, in this case, I think The Great Depression II: This time its a boat is more fitting for some reason.

  9. s/why/while/

  10. Its like Speed 2, only on a bus instead of a boat.

  11. There’s nothing that can’t be solved by throwing money we don’t have yet at it. Nothing.

  12. I first read the headline as:
    Government to Buy Equity Stakes in Crappy Bands

    It mights as well have. I don’t think I’d feel any different about that.

  13. The difference is, a crappy band *might* actually make money.

  14. At least crappy bands will sponge off their girlfriends before demanding bailouts from me.

  15. At least crappy bands will sponge off their girlfriends before demanding bailouts from me.

    Yeah, but they drive up the demand side of pricing for good drugs, so fuck them.

  16. Yeah, but they drive up the demand side of pricing for good drugs, so fuck them.

    No they don’t. The girls come easy and the drugs come cheap, and we’ll all stay skinny ’cause we just won’t eat.

  17. cunnivore,

    When I make an argument, I leave room for very little confusion about what I’m doing.

    And what you meant to write is that there have been higher one-day declines in the Dow-Jones average in the past seven decades. What’s going on right now on Wall Street isn’t primarily a stock market problem, but a problem in other sectors of the financial system so severe that we’re seeing Dow Jones plummets comparable to the popping of stock market bubbles, merely as a secondary effect.

    You can say you’ve seen a bigger house fire, but the point is, this house is on fire because of an explosion a mile away.

  18. Here’s a radical suggestion. Why not invest in *competent* banks, if you’re going to invest in anything.

    My theory is that competent banks can make loans just as well as the banks with a history of criminal incompetence. Maybe even better.

  19. What’s going on right now on Wall Street isn’t primarily a stock market problem

    But the stock market is the best measurement of the size of the problem.

  20. Well we are bailout slinger, we’ve got golden fingers
    And we’re loved everywhere we go
    We throw money at banks and money at lenders
    At seven hundred billion a go
    We write all kinds of checks for love and for sex
    But the thrill we’ve never seen
    Is the thrill that’ll get cha when you get your pictcha
    On the cover of the Forbes Magazine

  21. Max,

    Or even better, we can let the competent banks buy out the incompetent ones for pennies on the dollar after they fail. If would be fun to see Small Town Middle America Sanity Bank owning Wachovia or something.

    “We bought them from our retaining earnings from the mortgages we wrote over the last 5-10 years – you know those where the people had 20% down, a solid earnings history, good credit, and werent buying in a super-bubbly coastal market. But where just a small town bank, we arent smart about all those fancy financial transactions.”

  22. Dear Baby Boomers.
    Thank you for fucking your children’s generation in the ass!

  23. Max,

    But the stock market is the best measurement of the size of the problem.

    I disagree. I think the performance of the Dow Jones has become very much overrated as a measure of the broader economy, as a general principle.

    But even given that, the performace of the Dow Jones Indutrials is going to reflect (however imperfectly) the broader economy as a whole, while the mortgage meltdown/credit squeeze’s effects haven’t even been fully felt yet by the broader economy. The construction projects that can’t get loans, for example, are ones that wouldn’t have even started yet, while the construction loans companies got two and six months ago are still paying for people on the job.

  24. It’s sort of like those Top 10 lists that rate “Heroes” as the #1 Sci-Fi show of all time.

    In 1973 one of the local Rock and Roll radio stations did a countdown of the top 100 songs of all time as selected by the listeners.
    #1 was (Fuck! This hurts my brain to type) “Joy to the World” by Three Dog Night.

    Johnny B. Goode didn’t make the list.

  25. The difference is, a crappy band *might* actually make money.

    See my previous.

  26. But even given that, the performace of the Dow Jones Indutrials is going to reflect (however imperfectly) the broader economy as a whole, while the mortgage meltdown/credit squeeze’s effects haven’t even been fully felt yet by the broader economy.

    No, that’s wrong. The stock market is not a reflection of what happened in the past. It’s a reflection of what people, mostly sophisticated investors, believe will happen in the future.

  27. Joe sed: “But even given that, the performace of the Dow Jones Indutrials is going to reflect (however imperfectly) the broader economy as a whole, while the mortgage meltdown/credit squeeze’s effects haven’t even been fully felt yet by the broader economy.”

    If that is true, load up on short positions. If not, you kind of have to acceed to Max’s point.

    Kind of pointless to discuss what stocks mean aside from the price that people are willing to buy and sell stocks. The only way to decide what the dow means is by trading it.

  28. My theory is that competent banks can make loans just as well as the banks with a history of criminal incompetence. Maybe even better.

    Chuck Schumer’s theory hypothesis brain dead, magic pony thinking is that the politically motivated politicians or sinecured government hacks can do it better.

    Amazingly enough, some people find that argument pesuasive. These people have never driven one of these.

  29. No, that’s wrong. The stock market is not a reflection of what happened in the past. It’s a reflection of what people, mostly sophisticated investors, believe will happen in the future.

    …to the value of stocks. What they believe will happen in the future to the value of stocks. Which brings us back to the “broader economy” vs. stock market point.

    Those sophistacted investors also capitalized pets.com to the tune of $1.5 billion, so let’s not u crown them quite yet.

  30. If that is true, load up on short positions. If not, you kind of have to acceed to Max’s point.

    This is the lamest argument, but it keeps being thrown out there.

    Shorting, for an individual investor, is about predicting the timing of things. Oh, and it requires one to have money.

  31. …neither of which are credible measures of whether one can foresee broader trends in the stock market.

  32. joe,

    Oh, and it requires one to have money.

    Nah, it just requires you to convince people with money that you are right, so you can use their money.

  33. robc,

    Well, I’m sure that there are plenty of people with money looking to hand it out.

    And also too, there’s a ban on short selling right now. Which, you betcha, doesn’t have anything to do with those sophistical investors domoarrigato was talking about having a sense of where the stock market is going.

  34. Those sophistacted investors also capitalized pets.com to the tune of $1.5 billion, so let’s not u crown them quite yet.

    The point is not that investors are omniscient. Nobody knows the future. But the market reflects the guesses of a large number of mostly very smart people.

    So again, the market is the best available measurement of the size of the problem.

  35. “the performace of the Dow Jones Indutrials is going to reflect … the broader economy as a whole”

    You were the one who made a predictive statement about stock values.

    “Those sophistacted investors also capitalized pets.com to the tune of $1.5 billion, so let’s not u crown them quite yet”

    you certainly could/should have shorted them.

    “there’s a ban on short selling right now.”

    Not on indexes as a whole through futures or ETF’s – or on buying ETF’s or options that are essentially short positions. Try SKF, or buying puts, and selling calls. basically the ban just gave options/derivatives market-makers a monopoly on shorting – didn’t eliminate it at all.

    Having money is essential, but then if you have none of it in the stock market why would you care in the first place?

    Shorting, or buying for that matter, is no more or less about timing for an individual investor than it is for a professional. Nor, in my professional experience, are professionals any better at it – often a good deal worse.

  36. Max,

    But the market reflects the guesses of a large number of mostly very smart people. ABOUT THE VALUE OF STOCKS.

    So again, the market is the best available measurement of the size of the problem. IF THE PROBLEM IS THE VALUE OF STOCKS.

    domo,

    You were the one who made a predictive statement about stock values. Yes, I am. So?

    you certainly could/should have shorted them. And I didn’t short them. And Pets.com is now out of business, and its value is zero, even though I, joe from Lowell, did not short them. Perhaps there is a lesson here about the relationship (or lack thereof) between whether I, joe who lives in Lowell, engages in short selling and whether the value of a stock, or the market as a whole, is going to decline.

    Not on indexes as a whole through futures or ETF’s – or on buying ETF’s or options that are essentially short positions. Try SKF, or buying puts, and selling calls. basically the ban just gave options/derivatives market-makers a monopoly on shorting – didn’t eliminate it at all.

    See, I didn’t even know any of that – and yet you are going to take the fact that I am not betting money I don’t have on transactions I don’t understand as evidence that I don’t really think the stock market is going to go down? Could there, perhaps, be some other reason?

    Having money is essential, but then if you have none of it in the stock market why would you care in the first place? First of all, I do have money in the stock market, through an IRA. Second, I’m the one arguing that the stock market DOES NOT reflect the state of the broader economy very well, and that the results of the credit squeeze haven’t completely shown up in the Dow Jones, remember?

    Shorting, or buying for that matter, is no more or less about timing for an individual investor than it is for a professional. It’s about timing for both.

  37. The girls come easy and the drugs come cheap, and we’ll all stay skinny ’cause we just won’t eat.

    Fucking Chad Kroeger. You can’t party a night in Vancouver without seeing that dude at some point. Thank you, Canadian content laws.

  38. “the performace of the Dow Jones Indutrials is going to reflect … the broader economy as a whole”

    Well if the DOW continues to perform at the same rate as the past five days, it will hit zero just in time for Thanksgiving.

  39. Fucking Chad Kroeger. You can’t party a night in Vancouver without seeing that dude at some point.

    Do not mistake my quoting of that song for any type of endorsement of Nickelback. Of any kind.

  40. Taxpayers would benefit because the government would receive an equity stake in the bank in return for providing the capital.

    No, taxpayers won’t benefit at all if the government owns stock. Nobody’s taxes will be reduced by one penny.

    Honestly, are people in government so ethically vacant that they don’t see any conflict of interest at all in having the government invested in some banks but not their competitors?

  41. Well if the DOW continues to perform at the same rate as the past five days, it will hit zero just in time for Thanksgiving.

    BDB thought he’d made a typo when he wrote about what would happen if the Dow went below 1000.

  42. Recent events drive home just how important it is to a have a retirement plan.

    My plan is to get one of those three-wheeled bikes with the big wire baseket on the back, and ride around town with a straw hat, tan shorts, black socks, and a long beard, collecting cans to return. See, I can put ’em in the basket.

    Oh, and file lots of articles at Town Meeting.

    I don’t see why so many people put off retirement planning.

  43. But the market reflects the guesses of a large number of mostly very smart people. ABOUT THE VALUE OF STOCKS.

    Yes. And stock returns are correlated with the economic cycle, in case you haven’t noticed.

    An investor is paying for a stream of future dividends. If the dividend stream is cut, as by a recession, the shares are worth less, all else being equal. That makes the market a barometer of economic health.

  44. My plan is to get one of those three-wheeled bikes with the big wire baseket on the back, and ride around town with a straw hat, tan shorts, black socks, and a long beard, collecting cans to return. See, I can put ’em in the basket.

    And with free municipal wifi, you could continue to post here while you do it.

  45. Yes. And stock returns are correlated with the economic cycle, in case you haven’t noticed.

    Imperfectly correlated, especially over the short term.

    An investor is paying for a stream of future dividends. Unless he’s short-selling, or speculating on the stock’s value. Please, explain obvious fundamentals to me some more.

  46. T,

    You take care now, young fellah. Cha-ching, cah-ching, here I go!

  47. “And somehow, if Bush has his way, maybe we the taxpayers will get big steaming piles of equity in a bunch of dying car makers and airlines too.”

    What’s your problem? We usually get nothing!

  48. I don’t argue for a minute that the stock market is a very imperfect barometer/predictor for the economy.

    But I think its the best we have. Anyone got a better economic “dashobard” indicator they’d like to throw out there?

  49. But I think its the best we have. Anyone got a better economic “dashobard” indicator they’d like to throw out there?

    I bet gross tonnage of garbage would work pretty good. But I don’t know where to find that figure.

Please to post comments

Comments are closed.