Why Paulson Doesn’t Want Preferred, or Turning Japanese

That’s why I’m turning Japanese
I think I’m turning Japanese
I really think so

    — "Turning Japanese", The Vapors

A primary objection many people seem to have to the Paulson plan is the unwillingness of Paulson and Bernanke to take preferred shares in any financial service company that participates. The argument is that if we are going to bail you out by overpaying for illiquid paper at prices higher than market, then there better be a stake for taxpayers in the offending company. After all, as Jeff Matthews points out, why can’t we get a better deal for bailing out awful firms than Warren Buffett can get by investing in a good firm?

The Paulson/Bernanke response, it seems, is that they oppose anything that would keep firms from participating in the program. To that way of thinking, taking preferred shares in the firms would make them think twice about participating, which would be bad insofar as the real goal here is to speedily vomit up as much of this toxic paper as we can. Slowing that process down defeats the purpose and makes the bailout turn Japanese.

My thought. I take the point, and in some sense I agree, but it is impractical and unpalatable. The plan currently reeks of bailout, with no dilutive quid pro quo. The sooner we get past this point the better, and it looks like it is Paulson and Bernanke that are going to have to give in.