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Congress Prefers Circus to Bread...

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September 24, 2008 – Comments (6)

Latest word is that Paulson has caved on the executive compensation thing for the bailout plan, but won't yet agree to equity stakes in payment for the taxpayers' taking on banks' rancid debt.

The "hang the executives" clause might feel nice, but its not nearly as important as giving taxpayers a contingency chunk of equity. Quite simply, bank equity holders are getting an undeserved gift with this bailout. Without it, many, many, many would be toasted and gone in the coming months. By getting a do-over on their stupid lending practices, they're being hauled back from the brink. The taxpayers who are doing them that favor should receive equity in return for that.

Buffett got it from Goldman, did he not? Well, we're in a much stronger bargaining position than he is.

Do it this way: if the assets the banks dump on the taxpayers turn out to be worth what we paid, or more, no equity stake. Slap 'em on the back, tell 'em they got a favor anyway, and send them along. But if it turns out their junk can't be sold for what we paid, or doesn't product the cash flows it should, then bang, the equity option kicks in. After all, the only reason that equity is worth anything more than zero or close to it is because the taxpayers took on the sludge.

Sticking it to the greedy execs would be psychologically satisfying, but in the end, its a very poor payoff compared to a well structured contingency plan that would get taxpayers a slice of equity.

Sj

6 Comments – Post Your Own

#1) On September 24, 2008 at 7:54 PM, starbucks4ever (97.98) wrote:

Don't you think that 90% of CEOs will rather drive their companies into bankruptcy and collect their severance payments than accept the bailout from the government and forfeit their generous compensation. Paulson understands it as well, that's why is so desperate to protect CEO compensation.

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#2) On September 24, 2008 at 8:11 PM, StatsGeek (29.37) wrote:

I don't get it, Seth.  You're saying that if the equity turns out to be worthless, the taxpayer gets a share of it, but if the equity is worth something, the fatcat bankers keep 100% of it?

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#3) On September 24, 2008 at 8:51 PM, TMFBent (99.80) wrote:

No, I'm saying that much of this equity would turn out to be worthless without the injection. It'll float after the bailout takes the bad debt off the books.

If the debt we take turns out to be worth less than what we paid, we get a stake of the equity of the dumper.

If the debt we get is as great as claimed, and it turns out to be worth the same or more than we paid, then we leave the equity of the dumper alone.

I'd love to extract equity from any participant, but if this bailout happens (and I still would rather it didn't...) and we believe that companies won't take advantage if they have to give up equity, then offer them a deal that leaves their equity alone if the debt they dump turns out to be as good as claimed.

Sj

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#4) On September 24, 2008 at 8:54 PM, devoish (96.39) wrote:

I don't want to spend the 700bil so my price includes the equity and the psychological satisfaction.

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#5) On September 24, 2008 at 8:56 PM, pjani06 (29.26) wrote:

Hey Bent,

Thanks for this blog post, inciteful, as always. 

I'm with Stats, like you said, we, the taxpayers, should be in the driver's seat on the bargaining table, if we choose to comply at all. 

Looks like news media is channeling attention the way of alternate solution out of this mess (fedupusa); please provide some thoughts on a post I just put up minutes ago here: The bailout runs into a populist backlash - Los Angeles Times

provide some discussion / agree/disagree with my points if you care to, itd be much appreciated. 

Thanks. Report this comment
#6) On September 24, 2008 at 9:16 PM, StatsGeek (29.37) wrote:

Ok, I get it.  If a company can repay the debt to the government at 100% of what the government gave them for it, then the taxpayer doesn't get any equity.

That might be ok, in theory but could be very tricky to implement.

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