...too hastily. Sorry for the quick scribble (at one point I slipped from billions to millions in my numerical example), I've got comprehensive exams Monday.
SA
> Michael Pollak wrote:
>>
>> On Fri, 26 Sep 2008, SA wrote:
>>
>>> The banks need to be recapitalized. But the Paulson plan is an
>>> outrageous giveaway. Here's a better plan. Lets say the banks need
>>> $700 billion - that's 30% of the total market cap of the financial
>>> sector. But nobody wants to invest and the banks don't want to be
>>> invested in. So in my plan, the government forces the banks to sell
>>> stock to the taxpayer using a mechanism similar to a cap-and-trade
>>> system:
>>
>> I have questions, mainly technical -- I'm not at all sure what you're
>> suggesting here, probably because it's so mercifully brief
>
> Boy, I really didn't explain this very well.
>>
>>> 1. Each financial company is required to sell the government an
>>> amount of stock equal to 60% of its market cap as of some past date.
>>
>> Okay, let's say the market cap of Citi is $100bn. The company can't
>> sell the government $60bn worth, because it doesn't own it (KIA does,
>> among others.) Do you mean it should issue a new $60bn? Is this
>> ordinary stock or preferred stock?
>
> No, this would be newly issued stock. Otherwise, it's not a
> recapitalization. Probably it would be preferred stock - preference
> dividends and no voting rights. (Though maybe voting rights.)
>>
>>
>> And what are you thinking about when you say "some past date." You
>> mean before the troubles, when banks might be worth 3 or 4 times what
>> they are now?
>
> No, "some past date" is just to prevent the announcement of the plan
> from itself affecting stock prices and thus market caps. It could be
> yesterday's date. Or average daily market caps for July 2008. Or
> whatever.
>
>>
>>> 2. However, the government also distributes to each financial
>>> company "waivers" equal to 30% of its market cap as of that date.
>>
>> I'm not sure how you're using the word waiver. Normally a stock
>> waiver is something I use to sign my stock over to you. What do
>> these waivers do, what do they claim, what does their price refer to
>> or measure?
>
> Oy, I shouldn't have dashed this off at 4am..... No, by "waiver" I
> mean an exemption from the stock-selling requirement. So to use your
> example: If I'm Citibank with a market cap of $100bn, the law requires
> me to sell the govt $60bn in newly issued stock. But the government
> gives me "waivers" - credits - exempting me from $30 bn of that
> stock-selling requirement. So right now, in total I have a net
> obligation to sell the govt $30 bn in stock ($60bn minus $30bn).
>
> To continue with this example: If Citi feels well-capitalized and
> doesn't want to dilute its existing equity by $30bn , then it must go
> onto the market for waivers and buy up an additional $30bn worth of
> waivers from companies in the opposite situation (under-capitalized
> and needing money). Let's say Morgan Stanley, needing capital and also
> carrying a $100bn market cap, sells Citibank its $30bn in waivers. At
> the end of the transaction, MS will be left with zero waivers and thus
> the full $60bn stock-selling requirement and Citi will have $60bn in
> waivers and thus zero stock-selling requirement.
>
> MS thus is forced to sell $60bn in stock to the Treasury, which puts
> the shares in an equity fund. Let's say the equilibrium price in the
> waiver market was such that companies were willing to pay, say, for
> 20¢ for every $1 exemption from issuing dilutionary stock. Then the
> sale of $30bn in waivers from MS to Citibank cost $6bn. That $6bn
> Citibank paid will then be converted into a $6bn stake in the
> govt-managed equity fund composed of (inter alia) the $60bn of new
> Morgan Stanley stock. (Morgan Stanley would only receive $54 million
> from the Treasury for the $60 million in stock purchased - the other
> $6m was already provided by Citibank.)
>>
>>> 3. A market for waivers is established. Companies with extra cash
>>> buy wavers from cash-strapped companies.
>>
>> Why would they do this as opposed to buying some other security? A
>> speculative investment is what they need right now? Is there a
>> requirement somewhere as in cap and trade?
>
> I think this question is based on the assumption that I meant
> something else by "waivers."....But yes, the idea here is that strong
> banks invest in weak banks and the size of their investment is
> determined by how much they are willing to pay for the right not to be
> required to sell dilutionary stock themselves.....Keep in mind, it's a
> market. No one pays more than they think it's worth. If you don't want
> to pay, fine - but then the govt buys your stock and your existing
> equity-holders get diluted.....However, in the end the vast bulk of
> the recapitalization funds will come not from the strong banks through
> their waiver purchases but from the Treasury.
>
> One more thing: This plan could easily be extended to address
> Zingales' point about making creditors take a haircut. So, the
> bankruptcy law could be written to forgive companies' debt in
> proportion to the size of their (market-determined) capital injection
> from the Treasury.
>
> Seth
>