El Cuaderno de Arena

Reproduzco el editorial del FT sobre la decisión del gobierno USA. Creo que aporta la información esencial sobre la decisión

Time for a bail-out of bust US finance

Published: September 19 2008 19:48 | Last updated: September 19 2008 19:48

This is indeed the hurricane season. Over the past two weeks, the world has watched a huge financial storm drive the grandest vessels in the US fleet on to the rocks. The government has, in effect, nationalised Fannie Mae, Freddie Mac and AIG. It has let Lehman sink. A terrified Merrill Lynch then flew into the haven offered by Bank of America. The storm has even battered mighty Morgan Stanley and Goldman Sachs. This cannot go on. A government rescue is on the way.

At the beginning of this financial storm, a little over a year ago, many hoped that the private sector could rescue itself, with help from lower interest rates and easy liquidity from central banks. The failure of Bear Stearns then showed that one-off official interventions were also necessary, to save systemically significant institutions, among whom numbered investment banks.

That was shocking enough. But the events of the past two weeks have made such reactive approaches look inadequate. The devastating impact on confidence of the understandable decision not to rescue Lehman and the subsequent forced takeover of a huge insurance company has demonstrated the case for a systemic solution. A series of unpredictable, one-off interventions is, it is clear, inadequate. Something far more organised is now needed.

In its pragmatic manner, the US has now leapt to this task. One must assume that Henry (Hank) Paulson, Treasury secretary; Ben Bernanke, chairman of the Federal Reserve; and Tim Geithner, president of the New York Fed, have had quite enough of trying to save individual ships from sinking. Now they hope to build a taxpayer-funded safe harbour for the financial system. The details are unclear, but the intention, it seems, is to create a government-sponsored vehicle, to purchase the system’s toxic assets.

Delivery of the needed legislation will require bipartisan co-operation. Democrats will, understandably, wish to pin full responsibility for the debacle on the Bush administration. But they will also not wish to be blamed for a failure to co-operate in reaching an effective solution.

Naturally, the need for such a government-sponsored rescue is annoying. Taxpayers may well wish for the imposition of a special tax on recipients of what have turned out, retrospectively, to be unearned dividends and unjustified salaries. But demanding such a pay-back is infeasible. The pragmatic thing to do is let bygones be bygones, though not without paying close attention to the longer-run consequences of the rescue plan.

So what should a government plan look like? First, it must be as cheap as possible. Second, it must have enough funding. Finally, it must offer a solution. The last is the most difficult, because informed people hold opposing views.

The first view is that panic has driven down the prices of mortgage-backed securities to far below their underlying value. Moreover, these declines have, in today’s world of marking to market, caused death spirals for the perceived (or rather mis-perceived) profitability and solvency of financial companies. The second view, however, is that the financial system is being progressively decapitalised.

If the first of these views were true, the answer would be for the government to set a floor to prices. It would then act as a stabilising speculator, as governments often do in foreign-currency markets. A government-managed fund would purchase the good, not the bad, paper at prices it believed were below long-run value, but above prices in distressed markets. This would halt panic and improve the capitalisation of vulnerable businesses.

If the second of these views were true, direct injection of capital into systemically significant businesses would be needed, perhaps through purchase of preference shares. Until the business was in a position to redeem such shares, no dividends could be paid. In the event of a bankruptcy, the government’s shareholding would be senior to all existing and prospective private shareholders. Charles Calomiris of Columbia University has recently proposed a plan, on such lines, in the economists’ forum on ft.com.

So which of these approaches should be chosen? The answer is: both. What is needed are both capital injections into systemically significant, but undercapitalised, businesses, and a price floor, where opportunities for gain exist. The choice should be left to management of the new scheme, under a board of the highest probity.

Accepting that the position is so dire is hard. But it is. The government has to offer a comprehensive rescue that is also as cheap and effective as possible. This, though, is not all. It must also make clear that taxpayer-financed salvation has a price: for the financial sector, life will not again be the same.