Congress Prefers Circus to Bread...
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
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