Round Up the Usual Suspects!

Suddenly, everyone’s discovered that Paulson’s original thrust—to use TARP to buy “toxic” assets off bank balance sheets—was right, and that the subsequent tack—to use TARP money to bolster bank capital accounts—was wrong. Everyone has also seen the light with regard to Lehman: that letting the big investment bank fail was an error of terminal proportions.

Hindsight’s wonderful, isn’t it?

It’s also crap.

The crux of any asset-purchase scheme, then and now, is pricing. Pricing in a way that doesn’t so totally put the taxpayer at risk—by overpaying—that even Congress will balk. Working the way the Paulson team did, always under the gun, usually on weekends in order to get something done before the markets opened Monday, never allowed for a reflective interval during which to come up with a reasonably fair, reasonably rational pricing process.

The only scheme that possibly could work would have to involve X down and Y on the come, with X set low enough to make the likelihood of taxpayer loss, say, 1 in 10. Maybe X should be set at around 25 percent of par, with the balance (Y) in Treasury Income Notes (TINs) that would pay off as realizations occurred. Now throw in a dollop of ingenuity: The “toxic” assets for which the TINs would be exchanged would carry stock-purchase warrants at a negotiated ratio of so many warrants per $1 million of toxicity. That’s what warrants were created for: to have a value sufficient to make up all or a good deal of the difference between a bond sold at par and its probably stand-alone market value. Warrants are gap fillers, but they made money for the taxpayer in Chrysler and could do so again.

With a stroke of a pen, the Comptroller of the Currency could allow the TINs to count as statutory bank capital, which would effectively double the bang for the taxpayers’ bucks. Even to “rough-tune” such a scheme takes time, however, and if you’re worried about what the markets will think 48 hours from now, you’ll tell yourself you haven’t got the time and act in haste. And we all know what haste makes.

Personally, if I were running the show, I wouldn’t care what the market thinks, because the market has been ruined as far as “investors” are concerned, and is entirely in the hands of hedge funds and day traders, whom in a properly ordered world would be thrown off the Brooklyn Bridge. When Mr. Market marks big stocks like GE up 10 percent one day and down 10 percent the next, he has clearly fallen among bad companions and requires an intervention.

The criminally idiotic people who made/let this crisis happen are guilty of numerous counts of investment homicide, but perhaps the worst, in terms of deleterious long-range effect, is that among the road kill scattered up and down Wall Street are a couple of guys named Graham & Dodd. In all the drawn comparisons with the Great Depression, one item I never see mentioned is how long it took for the world’s owners of capital to overcome their mistrust of Wall Street sufficiently to buy and hold stocks. In 1939-40, there was so little work for the Street that people like my father, then a Lehman Brothers partner, went into the armed forces for lack of anything better to do. In his view, the prospect of a war was more likely than the prospect of a return of the investor trust essential to any Wall Street recovery, so why not enlist early and get a commission? It’s the same now. The death of Lehman may have been a shock, but the death of “Buy and Hold” may be even more dire in its effect.

As for Lehman, that was another black/white decision made under pressure. Why was Lehman allowed to fail? The revisionist version holds that while LB was still standing, Barclay’s was willing to do a deal provided LB or someone posted a $5 billion bond while Barclay’s went to its stockholders for their consent to a merger—but that regulatory authorities here or in the U.K. killed the idea. Maybe, but there must have been something that set LB apart from Bear Stearns in the bailout team’s eyes—and my hunch was that it was Lehman’s commercial real estate “book.” Someone in Washington may have reckoned, “Bail out Lehman, and here comes Harry Macklowe and—God help us!—D. Trump, Esq.”

Where it will all play out, knows God. Someone asked me recently what I’d like to see. “France in 1944,” I replied. “The big shots rebuilding the nation, while throughout the countryside, squads of citizens fan out, rounding up collaborators and subjecting them to hideous humiliations.” It is really truly amazing how little remorse (and guilt, of which remorse is supposedly an earnest) is out there. On Charlie Rose, Citi’s Pandit spoke in oily manner of “loans we don’t want,” as if these had been suddenly placed on his balance sheet by the Wicked Witch of the West. It’s the same everywhere you look. Someone else’s fault.

In Italy, when they bring down some big Camorra goombah, the state confiscates his assets. I see very little moral difference between the criminalizing of waste management in Naples and what happened here; the economic difference is exponential, as would be the fruits of confiscation. When I started writing this column in 1987, I proceeded on the theory that the bad guys have names, and that they need to be identified, hunted down, made examples of and their lives ruined—just the way they’ve ruined so many of ours.