Organizations and Markets

Today’s Bailout Links

15 October 2008 at 11:26 am Peter G. Klein 1 comment

| Peter Klein |

Larry Ribstein:

Ok, so let me get this straight. Credit got all constipated from banks’ misguided feast on crappy assets. My thought (see, especially, the most recent posts in this archive) was that maybe bank managers need better incentives. 

I guess I must have been wrong, because the government is now putting a quarter trillion in non-voting stock. Well, that’s one way to fix the misalignment of manager-shareholder incentives — undermine the shareholders’ incentives too.

Dale Oesterle:

The Banks get below cost capital grants. Loans would cost 11 to 12 percent. The government gives them cash at 5 percent for five years and 10 percent thereafter with optional repayment; it is senior preferred stock. Large banks cumulate foregone dividends on the preferred; small banks do not. Existing shareholders still get dividends at past levels (no increases) and the government cannot vote any of its stock. Why ever pay it back? . . .

Lehman, J.P. Morgan and AIG look like AAA suckers. They paid dearly for their capital infusions. Greenberg, the ex-CEO of AIG and a major shareholder, is, sensibly, asking the government to renegotiate the AIG bailout package. The lesson for future crises? Stall, stall, stall.

Peter Schiff (via Karen):

After supposedly bailing out the fat cats on Wall Street, no politician wants to be accused of evicting struggling families. Once you understand this, all of your anxiety should melt away. Why pay your mortgage if foreclosure is off the table, and if you know that lower payments, and possibly a reduced loan amount, would result? A tarnished a credit rating is a small price to pay for such a benefit.

Unfortunately, this boon will not extend to those foolish individuals who either made large down payments or resisted the temptation of cashing out equity. The large amount of home equity built up by these suckers, I mean homeowners, means that in the case of default foreclosure remains a financially attractive option. As a result, these loans will be much less likely to be turned over to the government.

Entry filed under: - Klein -, Bailout / Financial Crisis, Law and Economics, Public Policy / Political Economy.