Friday, 26 September 2008

Call for Jesse Jones

I have a question. Why not just spend the $700B on buying bank capital instruments, ideally equity? Of course the price of that equity will be an issue, but if the need for capital is the real issue, why not just supply capital? After all, that way the good guys (who bought reasonable assets and are just suffering confidence problems) will live to see the their assets perform, while the foolish guys (who bought rubbish) will lose out. Yes, the government will lose too in that case, but at least investing in everything rather than just bad assets gives it some upside. And like any owner, it has a vote, so if a bank needs so much capital that the government ends up as a controlling shareholder, then they will have to behave (and pay people) as their owners instruct.

The good thing about this plan, then, is that it does not try to identify bad banks or bad assets - it scatters cash willy nilly over everyone, and expects that it will make money out of the ones who don't need (and some of those who do). Moreover knowing that the government is a firm buyer acts as a contingent capital instrument: the market won't mess with you because the worst that can happen is the equity holders are diluted. The CDS spread of the US goes to hell in this version, of course, but that has happened already so it isn't worth worrying about.

More comment (from the Post) can be found here.



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