Hank, the harsh truth is the market never liked your bailout plan (and we hated it). So now that the House has rejected it, let's look at the bright side. You'll have a chance to come up with a new one!
Not sure where to begin? We've attached a few ideas from Martin Wolf's excellent Economist Forum on the FT below. All of them, in our opinion, are better than the bailout plan the House just sent packing (although that one was much-improved over the original).
But first, Hank, get some sleep. This crisis isn't your fault. And the truth is there's just not that much you can do about it. Just try to keep the best banks alive and the system functioning, and let asset prices take care of themselves.
From "Two Better Bailouts"
Martin Wolf at the FT (above) has created an economist forum in which a bunch of luminaries are weighing in on how to do this right. Wolf observes that the Paulson plan is just a band-aid--treating a surface symptom instead of the root cause of the problem: our country's huge debt load.
Wolf also runs through the best solutions proposed by his panel. The goal of these proposals is the right one: recapitalize banks while having existing shareholders and bondholders take the hit. This puts the pain where it belongs--in the hands of investors who made (bad) free-market decisions. And it also puts the banks in a position to lend normally again (which the Hanke-Panke Plan won't, unless the government overpays for the trash).
Three solutions:
- Force banks to write down assets to market value, stop paying dividends, and raise new equity. We've basically tried this, and except for the top firms, it hasn't worked: Because no investors are dumb enough to invest.
- Force banks to write down assets and then recapitalize them by converting debt to equity. This hits both bondholders and shareholders, and it costs the taxpayer nothing. It will also likely be so unpopular with Wall Street--and, more importantly, investors--that it would be politically untenable.
- Force banks to write down assets and have the government take equity stakes via preferred stock. This is the way Buffett invested in Goldman (he was comfortable with the carrying value of its assets). It's the way the Sweden did it. It's also the way any responsible private market investor would invest.
All of these solutions force the banks to deal with their own problems--instead of forcing the government to hire managers to look after the crap-asset funds. They also force those who made the dumb bets to take the hit. Unfortunately, neither yet appears to be under consideration on Capitol Hill.
See Also:
House Blocks Bailout: LIVE UPDATES FROM WASHINGTON
Market To Feds: Your Bailout Was Lousy Anyway
