Wednesday, September 24, 2008

Paulson Determined to Overpay for Bailout

Treasury secretary Henry Paulson in explaining the bailout plan to the House Banking Committee seemed to suggest that he feels it's imperative for the government to overpay for the mortgaged backed paper that is weighing down financial institutions.

His reasoning is that the deal must be sweet enough to entice widespread participation in order to be successful. Warren Buffet voiced some disagreement with this sentiment on an interview with CNBC this morning. He suggested the government could actually make good money on this deal if it were to devise a mechanism to discover and pay actual market prices rather than "hold to maturity" prices. He said a good approach would be to buy a few of these securities and then turn around and sell them on the open market before making further purchases. That would give them a much better idea where fair market value might be for these things.

It seems to me, that in a reverse auction situation, less participation would actually work in favor of troubled banks. The fewer bidders, the better price they could demand. Besides, if a bank is healthy enough to turn down 60 cents on the dollar, why do they need a bail out? If they think they can do better in the open market, let them go to the open market.

The government's obligation is to the depositers they have committed to insure, not to the preservation of any particular corporate structure or entity. Liquidity will come back when the market decides it makes sense. I trust the market's judgment much more than any Washington committee.

Good decisions seldom come from an atmosphere of fear and panic. The fact that Bernenke and Paulson seem to be attempting to scare Congress into action indicates to me that doing nothing might, in the long run, be the better way to go.

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