Let's Buy Us Some Banks

An apparent trend in the various bail-out plans in the US, UK, and Europe: whatever one country does, all of the other ones have to do. Ireland, for example, was one of the first to start guaranteeing all bank deposits, and their move started to pull cash away from the UK. In the end, every country will have to adopt the strongest safety net of any country to prevent a flight to safety.

It also looks like the US will actually buy some banks. This is a good thing for three reasons:

• How much do we pay for a toxic MBS? No one knows. There is no market for them. How much do you pay for a bank? That's easy, there is a stock price. (It's not real high, but it does exist.)
  
• If we are going to give the banks some money, what do we get in return? If we buy a piece of the bank, we get a piece of their profits should they survive. No taxation without representation, so to speak.
• The only way a bank gets more capital to invest when we buy an MBS is if we pay too much! (If we pay the amount they have "on the book", then the buy-out looks like a net change of zero for them.) So when we buy toxic assets we have to overpay or hurt the bank. By buying the bank itself, the bank can do better.

Of course, this sort of sucks for current bank management and current bank investors. We should not care! The bank lobby hates the idea of tax payers having equity, and that alone is an endorsement in my mind.

The bank lobby, in trying to claim that buying the banks is a bad idea, say that this would scare away outside private investment. George Soros, who is the kind of outside investor we need, disagrees:

http://www.ft.com/cms/s/0/d68e10cc-8f45-11dd-946c-0000779fd18c.html

And of course I reiterate what I've said before...besides the problem of over-paying for toxic assets and not knowing what to pay for toxic assets, the government shouldn't own mortgages that are in high default - too much political pressure to not liquidate the houses by foreclosing. I hate to be in favor of foreclosures, but there is no light at the end of the tunnel until we work the sub-prime crud out of our system - delaying that process only makes it hurt longer.

Other ranty points:

• McCain is crazy to want to lower corporate taxes - they just had record profits for years...why would they need lower taxes? Money doesn't grow on trees! They're not going to do more business with lower taxes, they're just going to pay less taxes.
  
• I can't tell what McCain plans to do about houses from his web site. The devil is in the details: buying mortgages at face value is a terrible idea - it's a cash give-away to banks, just like TARP if TARP buys assets. (It appears that TARP will let the treasury buy assets or equity.) Buying the mortgages at face value is a bail-out to banks with poor lending discipline and, by artificially propping up home prices, stops the market from clearing to sane price levels.

The government does need to provide mortgage financing at good interest rates to credit-worthy borrowers, but banks need to eat the loss on their loans.