Saturday, January 10, 2009

Second Guessing TARP

There's a lot not to like about TARP, but there is even less to like in this critique by Bloomsberg
Jan. 10 (Bloomberg) -- Henry Paulson’s bank bailouts, done under “great stress” during the worst financial crisis since the Great Depression, failed to win for U.S. taxpayers what Warren Buffett received for his shareholders by investing in Goldman Sachs Group Inc.
I wasn't aware that the Treasury had the same objectives as Berkshire. Among other things, after finding out that tough love didn't work too well with some of the earlier interventions, the Treasury decided to go easy. Unlike the UK, they are no longer trying to extract a pound of flesh and want to inject capital on relatively favorable terms. They still have a net interest margin of a couple percent, so the easier they make it for the firms to survive, the better their chance of getting their money back at a profit. Note that some of the largest TARP recipients have been able to raise private capital AFTER the TARP injection.  Getting private investment after bailout money puts the Treasury in an even more favorable position. 

The money quote is this from Nobel Prize winning economist Joseph Steglitz:
“If Paulson was still an employee of Goldman Sachs and he’d done this deal, he would have been fired,” he said
Yes, but the Treasury isn't Goldman. The TARP isn't a profit center, its an effort to stabilize the financial system. Plus, the Treasury gets a little kicker that Steglitz either forgot or conveniently omitted. Namely that the Treasury has a perpetual 1/3 interest in every dollar Goldman earns in the future. Why doesn't someone ask Buffett if he would like to swap out their total respective positions. Buffett's yield and options for the Treasury's yield, options, and future taxes. I think Buffett wouldn't need an hour to agree to this deal -- you would just hear the word, "yes."


K T Cat said...

After Krugman won the Nobel, claiming that an economist is a Nobel Laureate isn't much of a compliment.


cap vandal said...

You can shear a sheep many times but only skin it once.

Seems like an energetic reporter can find an Nobelist to say almost anything.