27 Sep 2008

Kudlow’s Line in the Sand Against Bailout Lasts For Two Days

All Posts No Comments

In a CNBC description that ran on Thursday, Sept. 25, popular free market analyst Larry Kudlow had said he wouldn’t support the Paulson Plan if it contained corporate equity for the government or meddled with executive pay. Kudlow said:

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.

But, after two days, Kudlow is back on board. In his National Review piece on Saturday, September 27, he opens with:

The single-biggest mistake in the Paulson bank-rescue-plan marketing effort has been the failure to explain clearly how taxpayers are going to recoup $700 billion used to buy toxic assets at auction in order to unfreeze the banking system. In other words, folks don’t understand how taxpayers will be paid back, and may actually make profits, which will enable the new government debt to be erased after the Treasury bank-rescue is completed.

After explaining that the taxpayers will enjoy the cash-flows generated by the mortgage-backed assets, as well as the capital gains when they are sold back to private owners, Kudlow wants to make sure we see just how great a deal this is:

I don’t think a lot of folks understand this win-win scenario. Let me repeat: The taxpayers own the bonds the Treasury buys; the taxpayers own the cash flows generated by the bonds; the taxpayers own the profits when the bonds are sold; and the taxpayers benefit when the profits and cash flows are used to pay-down government debt.

Actually, for taxpayers, it’s a win-win-win-win.

Think about this. The troubled assets purchased by the Treasury right now are likely to be very under-priced because of the chaotic and frozen market conditions. But over time, through monthly cash-flow payments or through loan sales, taxpayers will get all their money back and in great likelihood a handsome profit.

Now what Kudlow never even addresses is, “Why doesn’t Warren Buffett or a bank in Dubai sweep in and buy up these MBS, if they are such an attractive investment at current prices?”

Last point: In this later article, Kudlow goes over six conditions that House Republicans want, before they will sign on. So presumably Kudlow is endorsing a bailout that obeys these conditions. As far as I can tell, the list makes no mention of executive compensation. So apparently Kudlow changed his mind in two days, on whether he could support this thing. His warnings against socialism were dropped when Hank Paulson got him to believe the taxpayers were going to profit from this scheme. Riiiight.

Comments are closed.