Sunday, September 28, 2008

The PLAN, the tactic, the strategy


In the beginning there was the plan. It was a take it or leave it and don’t-you-dare-modify-it plan endorsed by the Fed chief and the Treasury Secretary. The plan was a tactic: all or nothing. The strategy was to help beleaguered banks but now the tactic failed, the plan is changed and the strategy is in jeopardy. The plan was presented. There was an avalanche of criticism. Senators and Congressmen called the plan and its initiators, the political appointees Bernanke and Paulson naïve, saying they, as elected officials, have to be responsive to their constituents and constituents did NOT like THE PLAN.

What crap! So now there will be blood

Not sprung full borne from the head of Zeus?

These plans do not spring full blown out of the head of Zeus or Paulson or Bernanke. These guys certainly had floated trial balloons to the key committee heads before they ‘formally’ presented this plan, you can be sure of that. B&P were not told it is a ‘nonstarter don’t even try’. But, when the backlash from constituents (you and me) rolled in, the politicians retreated and they, of course, dumped on the naiveté of Paulson (a former head of Goldman Sachs and guy who is suppose to ‘plugged in’ and politically savvy) and on Bernanke who (as a former academic and Fed chairman) may in fact be more naïve on this score. But the committee heads were in on the ground floor and let these guys try to fly this lead balloon. Why? See below:

Follow the link below to a site that keeps score of to whom financial and real estate firms contribute. Mr Dodd is very high on the List. Barney Frank is up there ($2.5 mln mark) but not so much at the top. There you will find Obama, Clinton and McCain are up at the top. Are we surprised?

THERE WILL BE BLOOD…instead of golden parachutes…

So the revised plans calls for all the things Bernanke and Paulson first said we cannot do. Apparently participants in the plan will see (1) that the government takes a capital stake of some sort so taxpayers can share in the upside. (2) Golden parachutes will be banned for executives at participating firms. (3) It appears that some sort of an insurance plan will be launched. (4)Democrats will get some sort of assistance for homeowners but nothing very dramatic and (5) there is pledge to try and help out homeownership trouble where the government holds their mortgages. This is not want Bernanke wanted at all. There also will be oversight. (6) Paulson will not be king and (7) there will be judicial review.

Now there will be so much blood and pain one wonders about participation. The cat is already out of the bag, however. You do not ask for $700bln in permission without having a big problem to mop up. So if the plan is not well-subscribed we will know the sector is still in trouble and liquidity may remain illusive.

Liquidity or solvency?

It should be clear by now (A) judging from odd Libor goings on and (B) all the special lending facilities to ‘enhance liquidity,’ and (C) with a $700bln bailout plan that: the issue all along has been SOLVENCY (!) Not liquidity. Lehman failed because liquidity problems can be fatal. It is being sold piece-meal so we can’t easily tell if it was solvent at current market prices. But others have failed or had shareholder equity all-but wiped out. Now the new plan will a be first cousin of these other plans (Bear Stearns, Freddie Fannie AIG) and will require a similar kind of pain instead of letting firms off scot-free.

No one has asked the solvency question because it is too frightening. But when $700bln is at stake how could we think otherwise? How could they think we would think otherwise after such a request? How could it be otherwise if their judgment is correct?

So, in the end that is why Wachovia, once mooted as a potential acquirer of Morgan Stanley is itself being shopped for a suitor. Who knows who is well capitalized and who will be able to stand alone - or even stand with help - when securities are properly marked to market?

While the plan makes the world safe for counterparties it does not do the same for the shareholders of principals.