Sunday, March 22, 2009

Suggestion to Obama

The public isn't happy.

They will be unhappy if the Treasury or Fed loses billions on its loans.

They will be even more unhappy if the Treasury and/or Fed plus "private money" MAKE a lot of money buying toxic assets.  Per the NYT, under the headline, "Toxic Asset Plan Foresees Big Subsidies for Investors."
The plan is likely to offer generous subsidies, in the form of low-interest loans, to coax investors to form partnerships with the government to buy toxic assets from banks.
To help protect taxpayers, who would pay for the bulk of the purchases, the plan calls for auctioning assets to the highest bidders.

Assuming the reports are correct, private entities will put up $30 billion, the Treasury $120 billion, and borrow $850 billion.  This gives the hedge funds, etc. 5 x 1 leverage. If they make money, it will be considered an outrage.

Get ahead of all of this by offering to sell anyone shares in the Treasury's $120 billion stake.  For that matter, offer investors a chance to buy stakes of any/all the treasury bailouts at par.  These have to be offered to retail investors in small lots.

I would include entities like Maiden Lane III in this.

Also include a fund of bank preferred stocks.

There are a few risks here.  They may prove to be very popular and attract a lot of funds, but every dollar that the Treasury takes in can reduce their borrowing needs by an equivalent amount.

The other is that the investments will have a secondary market and there will be price discovery.  A small price to pay to give everyone a chance to bet with the big guys.

They really need to get with it, or they will soon be in a no win position.  It is so, so simple to eliminate this threat of a big give away to hedge funds -- by simply offering the same terms to individuals.  


babar ganesh said...

if i had a lot of spare cash (billions and billions) i might try setting up a private 'bad bank' and IPOing it to raise more money.

it seems like you would like the treasury to do something like this.

there is really no vehicle at present for people without huge amounts of money and without connections to invest in these illiquid markets. ordinarily one could invest in bank stocks -- but that is suicide right now as some of them will go to zero.

cap vandal said...

The Treasury will "own" 150 billion if it is fully subscribed. They could just offer a chunk of their equity share.

Whether it is a good or bad investment or good or bad idea -- if the public can't participate, it will be a huge PR problem if any of these make money.

It would be cheap to offer them up.

Hire Pimco or Vanguard to do the back office work. They could also do whatever they want on disclosure, etc. Make their own rules.