Thursday, September 25, 2008

Update on financial rescue plan, as if that's possible

News flying left and right even tonight as some House Republicans propose completely different ideas, compromises are still being negotiated on the deal that supposedly almost done, and rumors suggest that WaMu will be taken over by the FDIC in the morning and JPM will buy their deposits. That's a lot but here are a few brief comments on some of the open issues in the only plan we know. Compromises on oversight, CEO pay and other issues are more or less done. Here are some that might not be.

There are two issues being discussed that if included in plan could inhibit future capital raising by firms that participate in the rescue. For equity there is discussion of the government taking warrants or preferred stock in institutions that sell assets. This dilutes current shareholders who rarely forget about dilution and much more importantly it creates an impediment to future share offerings as the government is inevitably not a shareholder among equals. Why invest along side someone who is not on a level playing field. For debt, giving courts the right to individually restructure mortgage loans retroactively is a huge disincentive to the securitization markets. The securitization markets are not inherently evil. They allow for distribution of risk and give more capacity for lending institutions to serve their communities. The securitization markets were abused, used, and overextended by bad practices but getting back to the basic model would be a wonderful thing. Giving courts the right to restructure individual components at their will, in no systematic way, would not be attractive to investors who are putting up money long term and would be a nightmare for servicers who handle the back office for the loans and therefore raise costs. Getting companies back on their feet again with independent funding and stronger capital would seem to be the goal and these two compromises, if included, would be harmful for long term recovery. Of course the two proposals are politically attractive to many and on top of that they may seem like the fair thing to do, but they could well be detrimental to rebuilding the strength of the banking system.

One other issue under discussion is putting some sort of stop to foreclosures through government intervention which would of course require funding. On the surface that sounds like one reasonable side of a debatable argument. There is one problem. In 2008 the great majority of the increase in foreclosure from 2007 has been of homes that no one has ever lived in. They are homes built by developers and financed by banks, lots of new developments and condos in places like Arizona, California, Florida and Nevada. No way these commercial enterprises should be bailed out. They're often big businesses. If this foreclosure hiatus is penned into the bill, homes that have never been lived in or for that matter homes that have been warehoused by speculators should be excluded. The intent is to protect working families from being forced out of their homes in a recessionary environment.

In the time that it has taken me to write this, including an interuption to watch the Mets win in the 9th just down the road in a driving rainstorm, there will no doubt be more news on this serious financial crisis. Good night.


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