Comments on: Paulson’s Bank Recapitalization Plan

By: James Kwak

James Kwak — Fri, 10 Oct 2008 04:05:30 +0000

That’s also a good point. The issue of the government actually voting with its shares and in some cases appointing the Board and CEO is a controversial one I think Treasury wanted to avoid. Some people think it’s only fair. Other people think that the specter of government interference will discourage private capital. Still others think it is socialism.

By: Robert VanDerVelde

Robert VanDerVelde — Fri, 10 Oct 2008 00:46:20 +0000

Well, section 113(d) sort of bootstraps the authority to obtain ownership interests. Section 113 gives authority to buy troubled assets, and 113(d) requires that if troubled assets are purchased, warrants *should* accompany them. I say “should” because it is less that clear whether Treasury can purchase “troubled assets” without obtaining warrants; it may also be very significant that the warrants for future stock involve *non*-voting stock. So while Uncle Sam may get a preferential position, that ownership interest might not come with control.

By: James Kwak

James Kwak — Thu, 09 Oct 2008 23:47:21 +0000

113(d) does not provide authority. The passage you cite is a condition that must be met in order for the Secretary to “purchase, or make any commitment to purchase, any troubled asset under the authority of this Act.” It says the Secretary cannot purchase any such assets unless he is given warrants; it doesn’t say he can buy warrants.

You’re right that 3(9)(B) is where Paulson gets the authority. At the time of the debate, virtually everyone thought that this was likely to mean other asset-backed securities, like securities backed by credit cards or auto loans.

By: Robert VanDerVelde

Robert VanDerVelde — Thu, 09 Oct 2008 21:01:29 +0000

It is not too hard to find the provision that Paulson “claimed” to have found. Section 113(d) of the bill provides for purchases of “a warrant giving the right to the Secretary to receive nonvoting common
stock or preferred stock in such financial institution, or voting stock with respect to which, the Secretary agrees not to exercise voting power, as the Secretary determines appropriate”. Moreover, section 3 of the bill defines “troubled assets” which may be purchased as including “any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.”

By: Dan

Dan — Thu, 09 Oct 2008 19:18:12 +0000

Y’know, I was not at all excited about the government buying worthless securities, but actually investing the banks themselves is a much better idea. Frankly, earlier in the week I’d have said that the best we could hope for out of all of this was a one-way trip for Paulson to the Federal Prison System in honor of his many obvious conflicts-of-interest, but now I actually have a little hope for the future. I mean, why in Hell would anyone sign taxpayers up to buy assets above market price? And if the taxpayers WEREN’T going to pay more than market price, then obviously the market would have already cleared the assets without the gov’t's involvement. Heh. At least recapitalization through prefered equity purchase is a touch more ethical.

By: Are banks becoming government utilities like water, electricity or the Post Office? « The Bankwatch

Thu, 09 Oct 2008 18:32:41 +0000

[...] Paulson’s Bank Recapitalization Plan [...]

By: stefan saal

stefan saal — Thu, 09 Oct 2008 17:56:45 +0000

dear baseline, small point. the graphical layout of your blog is slightly confusing. you put your author and dateline at the bottom of the post. however, the thin dark line at the top border of the author field serves to separate the text from the author. wouldn’t putting this thin dark line under the blue field do a better job of boxing the info together? i know it sounds idiotic, but i find my mind troubled by this constantly as i scroll thru your stuff. sorry to trouble you with such a small matter…first time visitor