The WSJ now has a full article about the various and sundry plans to save the US financial system. It appears there are three parts (at least) to the plan:
At the center of the potential plan is a mechanism that would take bad assets off the balance sheets of financial companies, according to people familiar with the matter, a device that echoes similar moves taken in past financial crises. It’s size could reach hundreds of billions of dollars, one person said.
Another proposal would create federal insurance for investors in money-market funds, something akin to the deposit insurance currently available for regular bank accounts. The move is designed to stem an outflow of funds as consumers start to worry about even the safest of investments, a worrying sign of how the crisis is spreading to Main Street.
In addition, the Securities and Exchange Commission is set to propose banning short selling temporarily. It’s not clear how broadly the ban might apply, but is expected to apply to financial stocks. (See related story.)
I haven’t even begun to figure out what the cost of this will be. Actually, I guess there is no way to know the cost until the assets are disposed of, presumably sometime in the far future. Up front, though it seems to me that a fund with less than at least $300 billion wouldn’t impress the Street. Deposit insurance on money market funds? Your guess is as good as mine, but the idea seems to be that if they buy up all the bad debt and prop all the bad companies, then the money market insurance won’t cost us anything since defaults won’t happen.
Banning short selling is like treating the symptom and ignoring the disease. Short sellers are targeting financial companies because their balance sheets are opaque and the shorts assume that means its filled with junk. Investors won’t buy because they don’t know what’s on the balance sheet and they aren’t willing to take the risk of finding out the shorts are right. That’s why financial stocks are collapsing. It’s fundamental. Ultimately, the source of the problem is the junk on the balance sheets of the financial sector.
The only thing the SEC should do is make sure to enforce the existing rules against naked short selling. Andrew Cuomo is also investigating and his focus seemed to be more on the spreading of false rumors about companies. If a group is acting in such a manner to drive down a stock in which they hold short positions, that would seem to fall into the category of manipulation.
I’m not sure exactly why the market is reacting so strongly to these proposals. With no details yet, it seems premature to pick winners and losers. One thing is for sure. This is going to cost a lot of money and I’m not sure where its coming from. Does Treasury have the printing presses running overtime?
It will be interesting to see how this works. If the fund is buying the bad assets from the banks and brokers, who sets the price? Isn’t that the problem with this right now? No one knows what this stuff is worth. Do you pay the price listed on the banks current balance sheet? What if that is too much? If you offer a big discount, why would the banks sell it if its at a price that is less than where they currently have it marked? And if they did, wouldn’t that just reduce the banks capital? Another proposal seems to be injecting capital directly into the banks by purchasing equity. Leaving aside the idea of the government owning shares, wouldn’t that dilute existing shareholders? Isn’t that also part of the problem right now?
Or is the idea to place a floor under this stuff so everyone knows the minimum price they can get? Be a buyer of last resort? Again, I don’t see how that would get more capital into the banks so I don’t see how it solves the problem.
Or you could combine the two ideas. Buy the paper at the current mark and then place a floor under it. If it is sold sometime in the future and the government takes a loss down to the floor price, the bank would then have to make up the difference. If it is sold for less than the floor price, the taxpayer gets the rest of the tab. Presumably this would be far enough in the future that the future, more profitable bank can afford the hit. Until we get details we just don’t know.
I am distressed at the amount of government intervention in the market and I”m afraid we are making mistakes similar to what the Japanese did in the last decade. This has got to either increase the debt or increase inflation, if not both. In either case it would seem to reduce long term growth prospects. Are we the most selfish people on the planet? Rather than bite the bullet, pay down our debts and improve our balance sheet, we seem intent on making sure we can run up an even bigger bill for future generations.