Monday, October 13, 2008

$250 Billion Market Stability Initiative

The Treasury will inject (i.e. force) between $3-$25 Billion each into 9 of the largest financial firms in the form of preferred shares (a total of ~$125 Billion). This will make the Treasury almost a 1/5 owner of these banks based on closing market valuations (another $125 Billion will go into smaller banks across). I will say this, it solves the problem I posed in my Game Theory analysis in that each bank will choose NOT to participate. Here they simply have no choice.

Yves from Naked Capitalism has issues with the new "Market Stability Initiative" and I can't disagree. Specifically there are:

virtually no restrictions (the Bloomberg article mentions executive comp limits, but given Paulson's stance, expect this to be cosmetic), no (a la Sweden) having a disciplined process to figure out who was worth salvaging and concentrating rescue dollars on them, and having a strategy (consolidation, liquidation, spinning bad assets off into an Resolution Trust type "bad bank" vehicle) for the ones that didn't make the cut.

The Swedish government showed a profit by taking deliberate action. Throwing money at a dartboard isn't likely to produce good outcomes.
Comparing the size of the Treasury injections to each entities market cap (and this is AFTER a huge bump in equity markets Monday, which saw Morgan Stanley rocket 85%), we see that the equity injections are anywhere from 9%-48% by market cap... or in other words, what appears to be a random distribution and a rushed response.

I understand the importance of a promptness in tackling the problem, but the random, sequential approaches taken to date, that do not address a HUGE underlying problem in the economy (what ever happened to housing!!!!!!!!!!) creates more questions for me than answers.