Excellent analysis. But one point is missing: another reason this plan would cost less is because each dollar of equity preferred will support ten dollars of toxic assets (at market value)- assuming a 10% equity capital requirement. Under the current Treasury plan, the government would have to use ten dollars to buy ten dollars of toxic assets. The preferred proposal leverages the government funds more effectively, while protecting it against mis-pricing risk. Also, the warrants will be based on an observable market price (the firm's stock price), a clear advantage to trying to set prices for toxic securities of varying degrees of value and risk. In addition, limits on compensation could be built into the preferred provisions providing political cover and incentives to take out the government as soon as possible. This is clearly the approach the Treasury should take and hopefully will have enough flexibility to do so.
let’s hope that McCain and the house republicans are working out the details of a plan of this sort. I predict he will do well tonight and then follow it up tomorrow with this type of plan that will play well with the vast majority of Americans. heck, even the unions! And the dems will be forced to sign on.
well, at least this is what I’m hoping.
My letter to the Wall Street Journal editor:
The Treasury should insist that each bank that they buy mortgages from simultaneously raise capital in the private sector. This would allow the Treasury to buy the mortgages at the lowest possible price without endangering the bank’s capital base. It would also allow the Treasury to invest less money.
Charles Meek
www.offgridblogger.wordpress.com
Glad to see a decent plan proposed and not just throwing stones like I have seen too much of lately.
This wsj/paulson plan makes a great deal of sense to me. Shareholders and BODs need to exercise their governance roles fully or pay the consequences. Currently shareholders operate as if their only points of leverage are buying and selling a company’s stock - leaving operational and strategic decisions to management.
More importantly, it serves to indicate who one should listen to in trying to resolve this issue. In my view one should listen more to those who have a compelling and evidenced based explanation of both how this problem emerged and how to ensure that the pain is allocated in rough proportion to the culpability of those parties. Alas, since I fear our Government played a major role in the emergence of this mess with dumb policies we will all have to bear some of the pain in putting it right. Those politicians like Barney Frank who championed these dumb policies should pay a political price.
Unfortunately I fear that those most culpable will pay the least because they are actually deciding who will pay.