Ben Bernanke and Hank Paulson beat the bushes last night and found some members of the great silent minority to voice support for their bailout plan.
The supporters included Warren Buffett, who said on CNBC this morning that implementing some form of the plan was a necessity (and part of his reason for deciding to invest in Goldman Sachs. John Carney thinks, in fact, that Warren's partly stumping for the bailout out of self-interest).
However!
Even Warren thinks the proposed pricing plan is ridiculous. As a reminder, Paulson and Bernanke want to buy trash assets from the banks at a theoretical "hold-to-maturity" price that is well above the current market price. The trouble with this is that the "hold-to-maturity" price--if actually different than the market price (unlikely)--is not stamped on the assets like a price tag on a can of soup. The market is generally recognized to be the best estimator of "hold-to-maturity" value on the planet. So to suggest that a tiny team of government bailouters can glance at the assets, determine a fair price, and then not screw taxpayers is absurd.
Warren recommends that the government buy the trash assets at market value. Even this is a gift, since banks have no doubt done everything they can to avoid taking the full losses they should. But paying market value is a heck of a lot better than paying some theoretical "hold-to-maturity" value that rewards the banks for making dumb-ass bets.
Why don't Bernanke and Paulson want to pay market? Because they don't think the banks will sell their assets at that level. To which we say, "tough."
This can be dealt with two ways: 1) with a time limit (sell your stuff now or forever rot in bankruptcy court), and/or 2) with the government taking an equity stake in exchange for its largesse.
On the latter, note that Warren Buffett didn't buy trash assets from Goldman at a huge premium to market value. On the contrary, he let Goldman keep its assets and invested in a senior preferred stock paying a 10% dividend, with a huge warrant kicker on the back end. The government should drive a similarly hard bargain.
The economy is not going to recover immediately regardless. If this means waiting until banks realize that they're screwed to bail them out--and, in the process getting as good a deal for taxpayers as the government got on AIG, et al--then so be it.
Whatever happens, the government cannot reward banks for their idiocy by buying $700 billion-worth of trash assets at a premium.
See Also:
Warren Buffett: I Only Invested In Goldman Because I Think Congress Will Pass Bailout
Sorry, RTC History Suggests Stock Market Not At a Bottom
