The Paulson subsidy – a little rant

From Bernanke’s mouth:

If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.

First, banks will have a basis for valuing those assets and will not have to use fire sale prices. Their capital will not be unreasonably marked down

I’m starting to think that Paulson and company should pay exactly no more than the market price for the mortgage securities that nobody else wants. To say that the market for these products has completely disappeared isn’t quite right, it’s just that these securities are deemed almost worthless by most market participants. That is the market price. A deep, deep discount. There is still hundred of billions of investment money out there in the form of hedge funds and sovereign wealth funds and if these mortgage related products are a screaming buy then we would see them being bought up. The price reflects the risk. It’s simple. I agree that the assets will probably yield a profit over the long-run but that’s a highly speculative decision that the Treasury has no place making.

If the banks are seizing up due to fear because they have these dodgy, almost worthless assets on their books then the Treasury can take them and put them in the Hanky Panky fund, but why muddy the waters further by paying an elevated price and giving the banks billions in form of a disguised subsidy? The fact that paying the market price leaves the banks severely undercapitalised is a separate issue and it should be addressed separately for reasons of transparency and safeguarding the public purse. The government could provide loans-for-equity or seek another solution that addresses the funding problem. If they simply pay over the odds for the mortgage securities, all this additional money would simply be a subsidy transfer from the public to the banks. Not good. Not good one bit. Somebody step up and save capitalism from itself!


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