A nation of (involuntary) shareholders

I wouldn't expect Treasury to want to hold equity stakes for very long.

To look at what's happening -- or is likely to happen as we stumble along in ad hocery -- we're sort of backdooring our way into a government-supported recapitalization process without setting up a formal arrangement.

I wish we'd be upfront about what's likely to happen, but the probable scenario is as follows. Think of Treasury as a Rescue Agency. By taking equity stakes, it puts itself in the position to triage the walking wounded from those in need of hospitalization and others who are ready for the morgue. Tim Geitner will restructure and hive off back to the private sector the walking wounded ASAP. They'll hand the dead and dying over to Shelia Blair. And they'll take a bit more time with those who need a stay in the hospital while they provide some government-funded IVs and look for a home to take care of the patient.

We've seen this process repeat itself around the world in financial sector crises. The danger that LaPorta, Shlieffer et al warn of comes in countries where there is a tradition of heavy state management of economic sectors -- especially finance. That's not a US risk. Treasury under either Dems or Repubs isn't going to have an interest in managing the commanding heights -- and the pressures from the banking sector for government to get out of their business will be immense.

The success of the above approach assumes Treasury also tackles directly some of the asset (mortgages) and liability (CDS etc) problems instead of hoping against hope that providing more liquidity and implicit government backstops will allow the financial sector to grow its way out of the problem. Not bloody likely, IMHO. Japan and Latin America both had "lost decades" hoping to grow their way out of debt crises.

My bigger concern than how much equity Treasury is going to wind up holding (temporarily) is the risk of global contagion. I don't see how a US-only rescue plan is going to work in the long run, and the cross-border coordination issues are going to get gargantuan. The G-7's "hands-off" today left me woozy. Although if I were a FinMin of one of those countries, Paulson's 2-page concept paper wouldn't have been anything I'd have wanted to sign on to. They'd all get hooted down in their own legislatures and governments if they proposed such a blank check with no clear objectives or guidelines. Paulson's going to have to come up with a clearer program if he wants global partners.

How The Grinch Almost Killed Wall Street
(How the Grinch Stole Christmas revised by
William Banzai7)

Every Banker down on Wall Street Liked CDOS a lot...
But the Grinch,Who lived just north in Greenwich, Did NOT!
The Grinch hated those Street jerks for a whole list of reasons!
Now, that is why we are having this exciting fall season.
It could be his trader head was screwed on just right.
It could be, perhaps, that his white shoes were a little too tight.
But I think that the most likely reason of all,
May have been that his NAV was 12 sizes too small.
Whatever the reason, His smarts or his shoes,
He stood there last week, hating all Wall Street's Whose Whos,
Staring down at his trades with a sour, Grinchy frown,
Detesting those warm lighted screens in Wall Street town.
For he knew every Captain down in Wall Street beneath,
Was busy now, trying to sail through the great Subprime reef.
"And they're firing their traders" he snarled with a sneer,
"In three months its Christmas! It's practically here!"
Then he growled, with his Grinch fingers nervously drumming,
"I MUST find some way to give those investment bankers a drubbing!"
For Tomorrow, he knew, all the Whose Who of Bankers,
Would wake bright and early. And rush to save all their paper earnings!
And then! Oh, the noise! Oh, the Noise!
Noise! Noise! Noise!
That's one thing he hated! The NOISE!
NOISE! NOISE! NOISE!
Then the Whose Whos, young and old, would all fly Far East.
And they'd try to talk Korea and China into feasting on trading book yeast!
And they'd feast! And they'd FEAST!
FEAST! FEAST! FEAST!
They would feast on champagne and rare banker roast beast.
Which was something the Grinch couldn't stand in the least!
And THEN They'd do something He liked least of all!
Every Who down in Wall Street, the Bulls and the Bears,
Would stand close together, with opening bells ringing.
They'd stand hand-in-hand. And the Whos would start singing!
They'd sing! And they'd sing! And they'd SING!
SING! SING! SING!
And the more the Grinch thought of this Singing,
The more the Grinch thought, "I must stop this whole thing!"
"Why, for year after year I've put up with it now!"
"I MUST stop a Wall Street bailout from coming! But HOW?"
Then he got an idea! An awful idea!
THE GRINCH GOT A WONDERFUL, AWFUL IDEA!
"I know just what to do!" The Grinch laughed in his throat.
And he made a some quick calls to spread rumours of unkown CDS stew.
And he chuckled, and clucked, "What a great short seller trick!"
"With this phone and this screen, I'll batter those Wall Street Dicks!"

"PoohPooh to the Whose Whos!" he was grinchishly humming.
"They're finding out now that no White Knight is coming!"
"They're just waking up! I know just what they'll do!"
"Their mouths will hang open a minute or two,
Then the Whos down in Wall Street will all cry BooHoo!"
"That's a noise," grinned the Grinch, "That I simply MUST hear!"
So he paused. And the Grinch put his hand to his ear.
And he did hear noises over the trading screen glow.
It started low. Then it started to grow.
But the sound wasn't sad! Why, this sound sounded merry!
It couldn't be so! But it WAS merry! VERY!
He stared down at Bloomberg and Reuters! The Grinch popped his eyes!
Then he shook! What he saw was a shocking surprise!
Every banker down in Wall Street, the longs and the shorts,
Was singing! Without any White Knight at all!
He HADN'T seen a Big Wall Street bailout coming! IT CAME!
Somehow or other, it came!
And the Grinch, stood puzzling and puzzling: "How could it be so?"
"It came with out tickers! It came without a tab!"
"It came as Federal largesse in boxes and bags!"
And he puzzled three hours, till his puzzler was sore.
Then the Grinch thought of something he hadn't before!
"Maybe a Bailout," he thought, "is not just for financial Whooers"
"Maybe Fed bailout...perhaps...means a little bit more!"
And what happened then? Well...on Greenwich Main Street they say,
That the Grinch's taxes grew 12 sizes that day!
And the minute his wallet didn't feel quite so tight,
He whizzed with his Lexus through the Bronx morning light,
And he met those Wall Street boys for a Smith & Wolensky feast!
And he, HE HIMSELF! The Grinch carved the beef!

Probably too late, but how about letting all of these financial institutions file Chapter 11, then the RTC-style plan could be thought of as debtor-in-possession funding. Shareholders lose all, and creditors are paid off according to well-established bankruptcy law. When they emerge from Chapter 11, the DIP investment is paid off or converted to shares.

justin,

the relationship of the individual with the corporate world in the US style capitalism has always been double jepardy.

without government's periodic corrective redistributive intervention, the wealth and power is bound to capitulate toward the already wealthy and powerful, as we've witnessed.

then comes the tipping point where the system can't sustain itself, as the exploited at the bottom has nothing more to give and let the system collapse.

stupidity and arrogance of the power brings itself down. a poetic justice, indeed.

Is being a Patriot only for the military. Are these people who rob and fleece our country Patriot. I haven't heard one news organization bring up this topic. Particuly FOX who can make a big deal of someone not wearing a Flag Lapel. But big business and CEO rob american, and not once is there Patriotism question. Only Patriotism left in American is green.

"[T]axpayers ... ought to share in some of the upside at the companies thus bailed out."

Think this is going to work out any better than the other deals Wall Street has offered you lately? We're volunteering to take over-priced bonds with negative yields and they'll be so impressed with our acumen that they'll be falling all over Warren Buffet to sell shares to us?

Or you think when we walk into the now-owned brokerage, we'll find that the party moved on, its capital went down the elevator and over to Greenwich?