A Paulson-Cantor Plan Is a Win-Win

Townhall.com ^ | Saturday, September 27, 2008 | Lawrence Kudlow

[SFConservative]

The single-biggest mistake in the Paulson bank-rescue-plan marketing effort has been the failure to explain clearly how taxpayers are going to recoup $700 billion used to buy toxic assets at auction in order to unfreeze the banking system. In other words, folks don’t understand how taxpayers will be paid back, and may actually make profits, which will enable the new government debt to be erased after the Treasury bank-rescue is completed.

Here’s the key point: Any loan package bought by the Treasury will be 100 percent taxpayer owned. Period.

Let’s walk through this hypothetical for a moment. Through a market-driven auction, the Treasury will purchase some dollar amount — say $100 billion — of loans that banks will sell. The Treasury will then buy those loans at the prices that fill the auction, starting with the lowest prices and working up. Now, the Treasury will hold those bonds either to maturity or for a sale in the open market if rising prices in the market make that sale attractive. In other words, suppose the Treasury buys a bond package at 20 cents on the dollar. They hold it for a while, and if market conditions improve, they sell it for 50 cents on the dollar to some buyer (e.g., an investment fund, a private-equity fund, a hedgie). The Treasury will make the sale at the higher price in order to gain a profit for taxpayers.

In the meantime, as the Treasury holds the loans, the government will get monthly cash-flows coming in on the mortgages, or on any other loans that it owns. So it is win-win for taxpayers. First, taxpayers get the cash flow generated by the assets. (Something like a 10 percent interest rate.) Second, if the loan is sold for profit, the taxpayers will own that profit. And the new law must of course stipulate that all the cash flows and/or profits go for debt-reduction to protect taxpayers.

I don’t think a lot of folks understand this win-win scenario. Let me repeat: The taxpayers own the bonds the Treasury buys; the taxpayers own the cash flows generated by the bonds; the taxpayers own the profits when the bonds are sold; and the taxpayers benefit when the profits and cash flows are used to pay-down government debt.

Actually, for taxpayers, it’s a win-win-win-win.

Think about this. The troubled assets purchased by the Treasury right now are likely to be very under-priced because of the chaotic and frozen market conditions. But over time, through monthly cash-flow payments or through loan sales, taxpayers will get all their money back and in great likelihood a handsome profit.

I have been in conversation with leading House Republicans all day. And they understand these key points. Unfortunately, this understanding did not materialize in their original meeting with Mr. Paulson a few days ago. But now the actual reality is sinking in.

Another point: Republican leader Eric Cantor has an excellent idea for a federal bond insurance guarantee for straight mortgage-backed paper, financed by private-sector insurance premiums. That will improve investor confidence in mortgage bonds and will make those bonds highly marketable. Importantly, senior Treasury officials have told me that Mr. Paulson will accept the insurance idea as an option in the final bill, alongside the ability of the Treasury to purchase distressed assets.

Sources also tell me that other conditions will be necessary to bring the House GOP along. First, the ACORN slush fund must be removed. Second, the so-called union proxy to run a slate of corporate directors is a big problem. Third, all profits from the Treasury rescue mission must be used to reduce the national debt — 100 percent. Fourth, Republican members are opposed to bankruptcy judges setting mortgage terms and interest rates (Sen. Obama also is opposed). Fifth, the so-called government equity ownership of banks is distasteful because it effectively creates a corporate tax increase on banks at a time when they are struggling. And last, the Treasury secretary’s request for $700 billion is regarded as way too high.

Essentially, House Republican leaders want a slimmer, cleaner Paulson plan supplemented by Mr. Cantor’s mortgage-bond insurance program. I think it’s a good package that would be great news for stock and bond markets that are now ailing badly. It would set the stage for a gradual return to normalcy on the part of bank lenders, including loans to small businesses, consumers, and homeowners. It would be a pro-growth package at a time when the economy desperately needs a prosperity tonic.

Copyright © 2008 Salem Web Network. All Rights Reserved.

[SFConservative]

Kudlow, as usual, does an excellent job of laying out the facts without a lot of jargon and obfuscating language.

As was the case with the Resolution Trust Corporation, the likelihood is that over the years the taxpayers will make net money. It's the gain in value over several years of the mortgages bought now at fire sale prices, less the value of those mortgages in those portfolios that will still default. Not a bad deal so long as all the net gain goes to retiring national debt rather that be partially given to crooks like ACORN.

[cp124]

The money will be spent on new programs before it is collected.

[Recovering Ex-hippie]

Now...get ready for the Freeper DRama Queens screaming about how the REAL conservatives would just throw a temper tantrum for no logical reason to show they are TOUGH.

[Oldexpat]

This is all based on the assumption that the current market prices for these packages..ie..very low..is not correct. That houses won’t drop further and than repos won’t continue to grow. That is a big if. We have a lot of markets where the affordability of these repos is still out of sight.

[Carismar]

From Sec. 109 of the “Emergency Economic Stabilization Act of 2008”:

Allows the Secretary to use loan guarantees and credit enhancement to avoid foreclosures. Requires the Secretary to coordinate with other federal entities that hold troubled assets in order to identify opportunities to modify loans

[FlingWingFlyer]

Ditto!

We now have "trillions" to use for "free, universal healthcare" for everyone in the universe (after the federal "judges" declare it "unconstitutional" to deny "free" healthcare to everyone in the universe).

[Secret Agent Man]

It will not happen. We won’t be paid back. It will become another social security and the money, whatever the govt gets, will be spent on other programs - even before it comes in.

Ain’t gonna happen.

[Globalist Goon]

“the taxpayers will make net money”

In that case, why not turn over everything to the gubmint?

[rwilson99]

As laid out looks reasonable...

However is the Treasure going to look at these assets and buy at a certain CAP rate... and based on what the last 12 months of cash flows.

I know it’s a Catch 22... if Treasure buys these mortgages for 20 cents on the original underlying asset it has a great change to appreciate... however why wouldn’t Buffett go out and buy the same types of assets if there is a market at that price.

My concern is that Treasury buys this garbage at 50 or 60 cents on the original asset and gets buried.

[Terpfen]

In other words, folks don’t understand how taxpayers will be paid back, and may actually make profits, which will enable the new government debt to be erased after the Treasury bank-rescue is completed.

Lawrence, we are opposed to the plan precisely because we understand the pay back mechanism: government will make a profit on the re-sale of the mortgages back to the private sector, and that profit will disappear down the Washington DC spending hole as it would have already been allocated and spent years prior.

Congress never eliminates spending programs. Congress will surely never return the money to the taxpayers in the form of rebate checks. Congress will laugh at the notion of using the profit to make dents in the future costs of Medicare, Social Security, et al. So we're left with a scheme that forces taxpayers to essentially double-fund the expansion of government; once through the mortgage buyout plan, and once on April 15.

I have never watched Kudlow & Cramer, and if this article is any indication, I haven't missed much.

[rwilson99]

Tresure Treasury...

[eeevil conservative]

No plan is reasonable, or even considerable without a list of the thugs and crooks to be fired and investigated....

[Freedom'sWorthIt]

Thanks for this post.

[DouglasKC]

Lawrence, we are opposed to the plan precisely because we understand the pay back mechanism: government will make a profit on the re-sale of the mortgages back to the private sector, and that profit will disappear down the Washington DC spending hole as it would have already been allocated and spent years prior. Congress never eliminates spending programs. Congress will surely never return the money to the taxpayers in the form of rebate checks. Congress will laugh at the notion of using the profit to make dents in the future costs of Medicare, Social Security, et al. So we're left with a scheme that forces taxpayers to essentially double-fund the expansion of government; once through the mortgage buyout plan, and once on April 15.

Precisely. All this blather about "taxpayers earning a profit" is just blather.

[padre35]

Exactly, why oh why are the very people who put us into this mess now trusted to extricate us from it?

What is that about the difference between being rained on and being pissed on?

[zipper]

Sounds like a DRAMATIC expansion of government to me.

It went from three pages to 106 in a few days — the devil’s in the details.

[nj_pilot]

The single-biggest mistake in the Paulson bank-rescue-plan marketing effort has been the failure to explain clearly how taxpayers are going to recoup $700 billion used to buy toxic assets at auction in order to unfreeze the banking system.

Wrong. The single biggest mistake is to cram something like this down on taxpayers without an adequate explanation of why it is needed. The second biggest mistake is the arrogant assumption that we rubes are too stupid to get the absurdity of these dopes "fixing" an imaginary "crisis" in three days.

Abandonment of stated principles, action in direct opposition to their constituents' wishes, "heroic" late-night legislation in smoke-filled back rooms... the republicans will pay dearly with the base if they don't work to kill this pig. It is almost like the cynical relationship between union rank-and-file and union leadership: the union members that I know loathe the unions because they are nothing but self-serving collaborators with the other side. In this case, congress gets "bigger" and "more powerful" when it can spend more money. So to the cynical congressman, rep or dem, mission accomplished with respect to scope of responsibility. Sheesh.

What do you s'pose they will do when the market crashes tomorrow in spite of this mess?

[Aria]

Somehow this $ will end up in the hands of Rat voting blocs. They’ll get our money to ACORN and LaRaza constituents one way or the other.

[nj_pilot]

In the meantime, as the Treasury holds the loans, the government will get monthly cash-flows coming in on the mortgages, or on any other loans that it owns. So it is win-win for taxpayers. First, taxpayers get the cash flow generated by the assets. (Something like a 10 percent interest rate.) Second, if the loan is sold for profit, the taxpayers will own that profit. And the new law must of course stipulate that all the cash flows and/or profits go for debt-reduction to protect taxpayers. I don’t think a lot of folks understand this win-win scenario. Let me repeat: The taxpayers own the bonds the Treasury buys; the taxpayers own the cash flows generated by the bonds; the taxpayers own the profits when the bonds are sold; and the taxpayers benefit when the profits and cash flows are used to pay-down government debt. Actually, for taxpayers, it’s a win-win-win-win. Think about this. The troubled assets purchased by the Treasury right now are likely to be very under-priced because of the chaotic and frozen market conditions. But over time, through monthly cash-flow payments or through loan sales, taxpayers will get all their money back and in great likelihood a handsome profit.

Hey Larry: what if the assets are really worthless? how's that win-win-win-win-win? If this is such a great deal, why is noone willing to spend their own money to buy these "bargains?" Kudlow must be doing coke again.

[indianyogi]

Can the money be directed to Social Security Funds. Can Republicans attach this in the bill?