« Flight Delays, Some Anecdotal Empiricism | Main | The Paulson Problem »

Latest Stories

• Roubini: Bailing Out the Banking Bailout
• Flight Delays, Some Anecdotal Empiricism
• Diversions: Snow at Whistler
• Timeline for the Epic Lehman CDS Auction Tomorrow
• Russia Tries the "What Me? No Crisis" Approach

October 9, 2008

Roubini: Bailing Out the Banking Bailout

Fascinating piece over at RGE Monitor by Nouriel Roubini on the back-room machinations that led to today, where the emphasis with respect to the $700b bank bailout is now on equity injections, not the flawed idea of purchasing banks' toxic assets.

So where did Paulson get the authority to do such capital injection when there was no such authority in the wording of the legislation? Several of us had been explicitly and feverishly talking to Congress and the Fed and other senior officials (last week before the passage of the legislation) to include such explicit wording in the legislation; such campaign included the October 1st column by George Soros in the FT where he strongly argued – as many of us had recommended – to design legislation that explicitly allowed for public capital injection in banks.

... See the following important exchange between Jim Moran and Barney Frank that is now on the legislative record of the House:

Mr. MORAN of Virginia. Thank you, Madam Speaker. I won't take that much time. I do want to thank the chairman for his masterful leadership on this bill, and I do want to clarify that the intent of this legislation is to authorize the Treasury Department to strengthen credit markets by infusing capital into weak institutions in two ways: By buying their stock, debt, or other capital instruments; and, two, by purchasing bad assets from the institutions, in coordination with existing regulatory agencies and their responsibilities under this legislation, as well as under already existing authorization for prompt, corrective action and least cost resolution.

Mr. FRANK of Massachusetts. Will the gentleman yield?

Mr. MORAN of Virginia. I'd be happy to yield.

Mr. FRANK of Massachusetts. I can affirm that. As the gentleman knows, the Treasury Department is in agreement with this, and we should be clear, this is one of the things that this House and the Senate added to the bill, the authority to buy equity. It is not simply buying up the assets, it is to buy equity, and to buy equity in a way that the Federal Government will able to benefit if there is an appreciation.

... So, all is well that ends well. A totally flawed and ineffective legislation that did not explicitly allow to do the right thing – recapitalize banks with public capital injections – and was rather aimed to do the wrong thing (wasting $700 bn of taxpayers’ money to buy only toxic assets at an inflated price) was rescued at the last moment right before the House vote via an interpretation of the wording of the legislation in the record of the House that allowed such recapitalization.

Sphere It   |   Digg it   |   Bookmark it   |   Stumble it   |   Facebook it