Thursday, September 25, 2008

Bailout-Deal Warning

If the bailout bill allows executive pay-caps and government ownership warrants for all buying or selling institutions, I must withdraw my support for the bill.

There is no clear information yet on this crucial topic. CNBC is reporting that Sen. Chuck Schumer is telling people that pay-caps and ownership warrants will be included for all banks and others (Fidelity-type investment managers, KKR-type private-equity firms, etc.) that either buy or sell the toxic paper.

The Treasury Department does not want this simply because it knows it would be unworkable. In other words, giving up pay-caps and warrants would probably mean that only the most dire, down-in-the-mouth banks will sell, and they’ll sell the very worst imaginable paper. Meanwhile, no reputable institution is gonna buy the paper if they have to give up ownership or compensation rules.

So it would be stupid for Congress to write this kind of thing into the bill. It would go beyond France into pure socialism. It would represent a huge first step into government interference everywhere. And it would sink New York way down the list of world financial centers. London and Hong Kong would pass us by in the blink of an eye.

I’m trying to get more information on this. But here’s a very key point: No House or Senate member in his or her right mind should vote for this bill without reading it. There’s no telling what’s in there.

The stock market is applauding the pre-announcement of a deal. The Dow’s up over 200 points. And credit-market risk spreads are narrowing a bit on the bailout hopes. But let me tell you, if the U.S. government is gonna start to own all of our financial institutions, all these markets will sink like stones.