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"We do not want to reward failure":
The Treasury held a conference call for finance sector insiders tonight so they had a leg up on the Treasury Department's plans on the bailout draft (important, since the Treasury is executing it, and the draft leaves much of the details up to the execution). You can download it via bittorrent, if you care to listen in on their 40 minute discussion.
Via Yves Smith, who impartially observes:
This is simply scandalous. To have a group of interested parties get a privileged briefing by government officials on a matter of keen public interest flies in the face of what a democracy is supposed to be about. The proper method would either be a published FAQ on the Treasury website or a briefing with the media included.
The Treasury makes it very clear that the warrants they take on equity will not be punitive in any fashion. From the call:
It requires us to take warrants at the Secretary's discretion ... in the direct case [ed: a seizure of a failing institution] we will be very aggressive in taking warrants for the taxpayer benefit. ... Companies that sell over $100 million dollars into this fund must give warrants.
The warrants we can set at whatever level we want to set, it's not specified. We want to set that at a level so there is some upside for the taxpayers, but also encourages all firms to participate. This goes back to the spirit that
we don't want just failing institutions to participate but also healthy firms to participate. Having that discretion was very very important to us.
So healthy firms are encouraged to sidle up to the trough and take the taxpayer for $100 million with no downside for them and no upside for us.
Likewise, while the Treasury will be very aggressive about taking stock options on failing institutions, when healthy institutions come for their checks, the Treasury will set the price of the warrant at whatever level is high enough to keep the firm porking out. No downside for them, there, either.
The one substantive parameter of the agreement left in the sausage was watered down to gruel. All that's left to save our bacon is the pricing mechanism, but the price mechanism isn't specified. In the draft of the bill the section ironically titled "PREVENTING UNJUST ENRICHMENT" merely prevents "the resale of a troubled asset to the Secretary at a higher price than what the seller paid to purchase the asset". That is, the Treasury can't go higher than the inflated price of the asset at which the seller unjustly enriched themselves. That's not much of a restriction, and they seem keen to buy the securities at inflated prices, the better to keep them at the trough.
After explaining this all to callers, the Treasury Dept. adds "We do not want to reward failure."