just a quick question, which i’m sure there is a good answer to - why doesn’t the fed buy the stock, rather than the debt, of the troubled banks? i’m thinking that the banks should issue fresh stock, a rights issue, but instead of an investment bank we have the government underwrite it. that way the banks shore up their capital base, the fed gets something back for the cash, and the banks get to jettison their dodgy debt in a manner of their own choosing over time. the fed can insist on other stuff, like halting dividends for two years, caps of bonuses and salary etc, if they so wish. it seems to me this is much simpler, and easier to measure in terms of value and commitment.
what am i missing?
What are you missing? You’re asking me?
I would say this. That these in peril organizations are in part founded on various packagings and poolings of so-called toxic mortgages. If the fed simply buys stocks in these already clearly fundamentally unsound entities, it doesn’t address the root cause of their problems. E.g., WaMu received a $7B investment last spring, but still failed spectacularly. Now that the whole world knows the truth about the foundations of these companies, I think a simple cash investment would do little to reassure anyone that things were actually fixed. It might have worked if it could have been done without letting the world know what the actual problem was, but now that everyone does know they have to excise the rot at the heart of the problem.
Thanks for asking.
Comment by Terry Jones — September 28, 2008 @ 8:12 pm
that’s true to an extent. However, the problem in the market is not that there isn’t enough cash in the system, just that no bank is willing to lend to another whilst there is a risk it might fail. my argument is that an injection of capital would ease this. the fed would end up owning a substantial part of the institutions it is helping. the toxic debts (the default rate on which may be much less than feared) can be traded at market prices over time. the fed can sell its stake in the banks over time. it’s dealing with the problem in ways that the market can comprehend and price.
Comment by rustle — September 29, 2008 @ 12:38 am