Saturday, September 27, 2008

Follow the Market

Guest perspective/Roy Morrison

A real solution to our financial imbroglio is reasonably clear. Merrill Lynch showed the way.
First, sell bad paper at 20 cents on the dollar to those willing to bet it will eventually be worth much more.
Second, sell the company to a well capitalized entity more than happy to acquire the good assets. The immediate pain was felt by the investors and speculators both most culpable and most able to bear it.
Instead of squandering $700 billion buying bad debt to recapitalize the imprudent, the U.S. government should follow the Merrill Lynch example. The government buys troubled financial industry companies, or at least a controlling interest, and sells the bad debt at market prices. Don’t want to sell to Uncle Sam? OK. The market will decide what happens to your company.
By combining the infusion of public capital and the de-leveraging of companies with a strong position in junk, after a decent interval the U.S. government could sell its now profitable investments at a tidy profit for the taxpayer. Problem solved.
That’s the way market systems are supposed to work. Put up the cash. Take the profits and the losses. The George Bush-Hank Paulson bailout scheme is a speculator’s dream. Socialize losses. Keep the profits.
Haste in this case will not only make waste; it will make some people lots of money at public expense
The Bush-Paulson plan can happen only if they can stampede the congress into acting today to keep a highly leveraged house of cards from collapsing for just a bit longer.
It’s worth recalling the implications of Gresham ’s law from the 16th century updated for the age of financial derivatives before we squander $700 billion on bad paper. Cheap drives out dear if they exchange at the same price. Was true then. Is true now.
Caveat emptor.

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