Joe Nocera’s excellent piece in today’s Times leaves out one important point about the failure of Paulson’s initial TARP plan: price. Has so much happened since October that we’ve forgotten that the price Bill Gross and others were putting on the banks’s toxic sludge was 65 cents on the dollar, even after Merrill had effectively priced it in the single digits?
Everywhere I’ve turned these last few weeks, I’ve heard variations of the same refrain. “The original Paulson plan had it right — they had to get the bad assets off the banks,” said Ronald J. Kruszewski, the chief executive of the investment firm of Stifel Nicolaus & Company. “Before you are going to get intelligent capitalists to invest their money in the banks, you have to get these landmines off their balance sheets,” said Brett Duval Fromson, the managing partner of the Margin of Safety Fund. “The reason things are frozen is that nobody knows if the banks are insolvent or not — thanks to the bad assets on their books,” said Henry F. Owsley of the Gordian Group, an investment bank that specializes in “distressed situations.”
“If they wanted to follow the R.T.C. script, they would come to the immediate conclusion that they have to get assets out of the banks, and establish a market clearing price,” said Tim Ryan, head of the Securities Industry and Financial Markets Association. The R.T.C., of course, was the Resolution Trust Corporation, which managed (and sold) the bad assets on the books of banks during the savings and loan crisis of the 1980s and 1990s. At the time, Mr. Ryan led the Office of Thrift Supervision, and helped direct the response to that crisis.
Nocera goes on to make an implicit argument that nationalization is not only inevitable but should accelerated. In other words, the only way for the original TARP plan to succeed, and make sense, is through a nationalization process that would avoid having to buy the toxic assets from the banks for a ridiculously inflated price.
First Bailout Formula Had It Right
New York Times; January 24, 2009