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Congress seems confused over who are the bad guys that need to be punished.

They seem to be leaning towards punishing shareholders if their management decides to accept any form of federal assistance under the new plan.

This puts management in a bind: sell a few securities to the Treasury and let shareholders lose value to the government, or muddle through and don’t dilute the shareholders.

Management is likelty to do what’s best for management, and sell securities to the Treasury and sell the shareholders up (down?) the river. Just like they do when they issue a convert when stock prices fall, to shore up capital.

But Congress also thinks management needs to be punished with some form of salary and bonus caps. This would discourage management from utilizing whatever new facilities Congress comes up with. Which also makes shares less valuable.

Looks like a lose/lose for the shareholders?

It seems to me if Congress finds anyone at fault (whatever that means) it would be managers rather than shareholders.

What have shareholders done wrong, even in theory? It’s a stretch to come up with anything.

And who are the shareholders? Pension funds, ira’s, individuals? Why are they the objects of Congressional wrath?

With each government intervention, shareholders have been a favorite target to justify the utilization of ‘taxpayer money’ (whatever that means with an asset purchase).

Congress isn’t looking at who’s at fault, they are only looking to minimize risk to ‘taxpayer money’, even if that means taking funds from innocent shareholders.

Congress can be counted on to do what they think is best for them politically. So with something like 75% of the voters owning shares, it seems odd that they are the target.

And, of course, none of this address aggregate demand which is the key to output and employment (the drivers of corporate prosperity) and share holder value.


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9 Responses

  1. Warren,

    The point of emphasis seems to be that shareholders will not participate in any recovery of equity value. And with that reasoning, the government encouraged a $2 acquisition price for Bear, Stearns.

    And then, so it went with more-or-less emphasis with FNM, FRE, LEH, and AIG. But now, as you say, in the anticipatory mode of how do remaining companies accept the govt program, this will show itself to be increasingly problematic.

    I, for one, did not think that the govt would take such an interest in wiping out the preferred shareholders at FNM and FRE.

    It seems to me that the issue is this–if the govt is going to put up enough money to guarantee the solvency of a business, then it does have the right to make it a dilutive transaction. But it can do so by simply taking its proper place in the credit structure. Leaving the potential for a viable shareholder class where the government is a minority shareholder, would make for a cleaner exit down the road.

    The model is clearly flawed, but to a man with a hammer, every problem looks like a nail.

  2. yes, govt probably has the ‘right’ to do whatever it does.

    the issue is the public purpose served by its decision.

    seems to me most of this ‘bailout’ is much ado over nothing and in some ways not in line with any concept of public purpose

  3. Warren –

    So from what I’m understanding your position is, most of the “liqidity problems” could be solved with a simple rule change at the fed, moving the discount rate down to the FF rate and eliminating the demand for collateral?

  4. seems to me most of this ‘bailout’ is much ado over nothing and in some ways not in line with any concept of public purpose

    ‘System functioning’ is not at risk? Retirement plans tied
    to the stock market not in jeopardy?

  5. That comment above was not mine – looks like someone is messing around. (Either that, or there’s another Jim Baird around…)

  6. J,

    retirement plans that fall short are a separate issue from market functioning in the current context.

    Jim, thanks, not sure what to do except take down posts as notified.

    Mabye we need to post via email to Sada or something like that.

    working on it now.

  7. W,
    5 seconds ago, Benanke to congress (I paraphrase) “The system cannot function, the economy cannot grow, banks can’t lend to individuals and business in order for the economy to function”

    What would you say if you were the congressman given what you know.

  8. Banks are lending, the economy is growing- 3.3% last quarter, and can’t govt sustain agg demand at full employment levels with fiscal balance?

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