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George Soros hates Paulson's bailout
Posted September 25, 2008 11:02 AM
George Soros (AP Photo/Manish Swarup)
by Frank James
George Soros, billionaire financial speculator, philanthropist and
liberal boogeyman to many conservatives, doesn't like Treasury
Secretary Henry Paulson Jr. $700 billion bailout plan.
Indeed, from his Financial Times opinion piece, it doesn't sound like he'd allow Paulson to manage any of his billions of dollars.
Here's an excerpt. Pay close attention to what he says about
"asymmetric information," one of his favorite subjects. it's the idea
that not all parties in financial transactions have equal access to
best-informed party usually has the upper hand:
Mr Paulson's record does not inspire the confidence
necessary to give him discretion over $700bn. His actions last week
brought on the crisis that makes rescue necessary. On Monday he allowed
Lehman Brothers to fail and refused to make government funds available
to save AIG. By Tuesday he had to reverse himself and provide an $85bn
loan to AIG on punitive terms. The demise of Lehman disrupted the
commercial paper market. A large money market fund "broke the buck" and
investment banks that relied on the commercial paper market had
difficulty financing their operations. By Thursday a run on money
market funds was in full swing and we came as close to a meltdown as at
any time since the 1930s. Mr Paulson reversed again and proposed a
systemic rescue.
Mr Paulson had got a blank cheque from Congress once before.
That was to deal with Fannie Mae and Freddie Mac. His solution landed
the housing market in the worst of all worlds: their managements knew
that if the blank cheques were filled out they would lose their jobs,
so they retrenched and made mortgages more expensive and less
available. Within a few weeks the market forced Mr Paulson's hand and
he had to take them over.
Mr Paulson's proposal to purchase distressed
mortgage-related securities poses a classic problem of asymmetric
information. The securities are hard to value but the sellers know more
about them than the buyer: in any auction process the Treasury would
end up with the dregs. The proposal is also rife with latent conflict
of interest issues. Unless the Treasury overpays for the securities,
the scheme would not bring relief. But if the scheme is used to bail
out insolvent banks, what will the taxpayers get in return?
Soros then gives a big shout out to Sen. Barack Obama.
Barack Obama has outlined four conditions that ought to be
imposed: an upside for the taxpayers as well as a downside; a
bipartisan board to oversee the process; help for the homeowners as
well as the holders of the mortgages; and some limits on the
compensation of those who benefit from taxpayers' money. These are the
right principles. They could be applied more effectively by
capitalising the institutions that are burdened by distressed
securities directly rather than by relieving them of the distressed
securities.
The injection of government funds would be much less
problematic if it were applied to the equity rather than the balance
sheet. $700bn in preferred stock with warrants may be sufficient to
make up the hole created by the bursting of the housing bubble. By
contrast, the addition of $700bn on the demand side of an $11,000bn
market may not be sufficient to arrest the decline of housing prices.
Something also needs to be done on the supply side. To
prevent housing prices from overshooting on the downside, the number of
foreclosures has to be kept to a minimum. The terms of mortgages need
to be adjusted to the homeowners' ability to pay.