A Rising Sigh Sinks All Boats
Krugman is right about the Obama plan, both articles in today's New York Times (reg may be req'd). He's right that this creates a win-win for fat-cat private equity while providing no guarantee that the goals of the plan will be accomplished.
Where he goes wrong is where he waffles. "Yes, troubled assets may be undervalued," he says.
I say, "No." If these assets were undervalued, someone would have bought them at that price. There is only one way to know an asset's value: What did that asset or a identical asset just sell for?
Assets not selling at any price? Those assets, then, have no value. That is part of the definition of value. Not even Paul Krugman, a Nobel Laureate in Economics, can repeal that universal law.
I understand that these so-called "assets" need to be removed from the balance sheets of banks in order to avoid destruction of the financial system. Fine, remove them. But why must that process involve reward to the managers of those banks, and why on earth should it involve rewarding private equity, who will benefit hugely around the edges from "frictional costs" (i.e., their fat commissions) as they involve themselves in these win-win transactions?
In fact, this plan could make things worse. Here's how: Since the Fed/Treasury/FDIC will be putting in six dollars for every 1 dollar the private equity managers put in, and since they can walk away from those loans if they go south, there is an incentive to overleverage - to the hilt, to the very limit - and invest gargantuan sums of money in worthless assets. There will be frictional costs incurred for the 'management' of these 'assets' - someone will be skimming billions - and in the end, when all is revealed, and the assets' true price is zero, private equity walks away, losing 1/7th of their investment but having incurred 5 more years of fat bonuses and salaries for them and theirs.
Mr Obama, and I say this without any racial overtone intended, it's time to call a spade a spade. These assets are garbage and we, the taxpayers you represent as our executive, are bailing out bad banks who have a gun to the head of the world financial system. Why try to spin it pretty with this private equity frosting? You're not fooling anyone.
What's that, gentle reader? You say that you come to this space for market news and insight? All right, here it comes:
Even a dead cat can bounce, a little. Keep your powder dry and your cash sidelined. If you show profits, take them today.