Monday, September 29, 2008

I Guess we have to Trust Paulson

Even reading the finest print in the actual bill, I can't tell if the Bailout bill requires that the Treasury get an equity stake large enough so that it will profit or requires only a figleaf on a give away.

For example, when buying toxic waste Paulson will be required to (

"Make such purchases at the lowest price that the secretary determines to be consistent with the purposes of this act"

That's ironclad all right.

Now how about warrants ? The key issue is can Paulson just buy troubled assets as he proposed or must he obtain warrants which will make the return on the investment non-negative unless the firm from which he buys the assets goes banrkupt ?

Reading the bill, I'd say Paulson got whatever he wants. On the *amount* of such warrants (or senior bonds if the firm is not publicly traded)

(2) Terms and Conditions

[blah blah]

(A) Purposes.- Such terms and conditions shall at a minimum be designed -
(i) to provide for reasonable participation, by the Secretary, for the benefit of taxpayers, in equity appreciation in the case of a warrant, or a reasonable risk premium in the case of a debt instrument; and
(ii) to provide additional protection for taxpayers against losses from the sale of assets by the Secretary under this Act and for the administrative expenses of the TARP.


No numbers, no formulas, just words. And the words which would limit Paulson are "reasonable", "reasonable" and "additional".

There is nothing in the bill on the size of the equity stake. Paulson has the authority to decide that a warrant to buy one share is sufficient.

Now Paulson was ruthless with AIG shareholders. On the other hand he was not ruthless with an AIG counterparty -- Goldman Sachs -- whose CEO was present when he decided to go back on his brief no bailouts position and whose shareholders include uhm Mr Paulson. Do I trust him ? Do I have a choice. You go to financial crisis with the Sectretary of the Treasury you have not the Secretary of the Treasury you want.

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