- It's only a sweetheart deal if you at least kind of know what you're doing. Look at the stock market crash, and tell me that the broad public needs to be given the opportunity to take highly leveraged bets on complex securities. They couldn't even figure out that Kosmo.com wasn't going to work.
- Adding the public to the mix defeats the alleged purpose of the program, which is price discovery of the probable value of these assets, a la James Surowiecki's The Wisdom of Crowds. The public has even less idea than the bankers as to what these assets might be worth. If you substitute some sort of government manager, he won't particularly care what they're worth; it's not his money. Wall Street will do a very imperfect job at valuing these assets, but the public will be even worse.
- Non-recourse loans aren't costless to individuals: they show up on your credit score if you default, which is why foreclosure is so painful. Is Congress going to mandate that the credit bureaus ignore this information? You could mitigate this by setting up an intermediary, but that has substantial administrative costs, and almost certainly wouldn't be ready by go-time.
The taxpayer's gift will be not having double-digit unemployment and a ten-year recession if all the banks linger on in the land of the undead. This is, of course, very cold comfort, the more so because there's no way to observe the awful pickle we might be in if we don't use fleets of repurposed sanitation trucks to drown Wall Street in money.
One thing I do not understand is this: what incentive does a private investment have to co-invest with the government?
Why wouldn't a private investment fund assume that it will be the target of future populist outrage, and become a target for clawback legislation down the line?
Absent any guarantee on the part of the government that private funds with which it co-invests will not be subject to confiscatory legislation in the future, I don't see why a fund would choose to participate in this.
I'm not convinced that Kosmo.com wouldn't work if it were run properly. In high-density urban neighborhoods such as Manhattan, it acts as basically a smaller version of Amazon that delivers immediately for a price premium. You would need to generate the volume so that the inventory costs don't sink you. (something not possible with an internet-only presence in 1999, but perhaps in 2009)
The sweetheart deal can exist if the sweetheart has no idea that it's a deal. I, for one, would love for these deals to be public and really don't need the government to protect me from losing money. If that's their role, perhaps they can start by shutting down Las Vegas.
Also, I wouldn't be so quick to dismiss the intelligence of the public or bankers in the valuation of the assets. While I agree that the government manager would have no skin in the game, investors have money riding on the deal and learn what they can first. Bankers also commit the sin of following the crowd and having poor judgment.
Lastly, you are somewhat guilty of inspiring fear by claiming bad results if something isn't done. I believe I've read the humorous mantra "Something must be done, this is something, therefore this must be done" on this blog in the past. Using your own logic if we give only bankers sweetheart deals we might still have undead banks in 10-year recession and double digit unemployment.
Jayson
Kozmo never went public. Also, it was run by i-bankers. So to say that the group of people that didn't realize that Kozmo.com couldn't work shouldn't be able to invest in these partnerships means that i-bankers shouldn't be able to invest. I think it's funny that you say people that didn't realize that the internet bubble was a sham are too ignorant to invest in this, but people that thought loans to people that are bad at repaying loans were good investments are qualified to invest.
You mention the Wisdom of Crowds, but Surowiecki says wise crowds have diversity of opinion, independence of members from one another, decentralization and a good method for aggregating opinions. Adding the public only enhances this. It increases the diversity of thought, independence and decentralization. The classic example is people at an airport gate guessing how late a flight is. That crowd isn't full of meteorologists, pilots, mechanics and other credentialed folks, it's a random crowd. You have people that may be closer to the real estate market involved or other specific information that may give them a leg up (or not).
The first link goes to the amazon site rather than Yglesias' blog. The correct link is here.
Can I ask a question. With the auction, what type of information is going to be presented to the public or investors?
The public can take part.
The 2 most prominent fund managers who are going to participate. Bill Gross at PIMCO and Blackrock, both have numerous vehicles that are easily available for investment. Blackrock is itself also a publicly traded company (ticker BLK) and Bank of America owns a substantial position in Blackrock (ticker BAC).
Mo nails it.
Megan,
Now that you've winnowed down the number of commenters and eliminated a lot of the nonsense, I hope you will have time read smart comments like the one above by Mo. If you incorporate what you learn from them into your blog, it will only get better.
Mo and DaveinHackensack -
It might be good to let in the public, in this case, but we need to figure out their incentives, their information sets and what their addition would do to the entry and bidding incentives of the bankers and other more sophisticated bidders.
A good example is IPO auctions. Many countries have tried letting everyone have an 'equal' say on how to price initial public offerings, and it has led to some pretty spectacular problems. Having huge numbers of possibly unsophisticated individuals able to flood in unexpectedly and overwhelm the process adds noise and uncertainty.
As I understand it, though, one difference here is that these are single unit auctions (i.e. there would be only one winning bidder that would get everything), as opposed to the large multi-unit auctions used for IPOs. Thus there wouldn't be the free riding problem that occurs with "Dutch" auctions, where unsophisticated bidders can simply bid a really high price to be first in line, hoping that the clearing price will be set by someone more reasonable. Still, calculating entry and bidding strategies (including adjusting one's bid for the winner's curse) is complicated, over and above the complications of calculating the value of the underlying asset being auctioned.
Ann,
Just to clarify: I have my own concerns with the bailout as conceived. I wrote "Mo nails it" because he explained why Megan was off base with the two particular objections she raised in her first two bullet points. As Mo noted, you can't blame the public for bad dot-com investments that were made not by the public, but by institutional investors. And, if you are going to invoke Surowiecki's "Wisdom of Crowds", as Megan did, then you ought to understand that those crowds, in Surowiecki's conception, include not just experts but a diverse group of laymen.
"Wall Street will do a very imperfect job at valuing these assets, but the public will be even worse."
I think that the comments above already point this out but it worth being very careful here. Capitalism is based on many small and imperfect decisions being made. The issue with bankers valuing things is that of expert knowledge -- governments and experts are notoriously bad at setting prices (my memory of price controls does not suggest otherwise). The wider the auction base, the better the information.
Now there are risks that seem to be involved; if panic leads to low valuation than banks will fold. But that should create "buying opportunities" for smart investors. If we are past the point that individual investors can participate in these asset sales then we are moving into a command economy.
I'm rather sure that that would be an alarming development. :-)
"The wider the auction base, the better the information."
As I've already pointed out, this is not a general result. It's true in only in some circumstances.
It's only a sweetheart deal if you at least kind of know what you're doing.
What if those in charge of determining who meets this criteria themselves don't know what they are doing? The Newtonians didn't think Einstein was qualified to teach Physics 101.
Also, It maybe a sweetheart deal to someone who doesn't know what they are doing at all, but who turns out to be extremely lucky. The only way to know for sure is to let them take the risk (if they are willing) and see what happens.
From my point of view this is extreme arrogance on Megan's part. She's a pledge to the club. She's learning the secret handshakes and various other rituals. It doesn't even occur to her that maybe some of us can see all of the benefits of membership and still don't want to join because we see something that the insiders don't. We see that the existence of the club itself is harmful to society regardless of who is running it or how it is run.
People are easily corrupted when they are allowed to play by a different set of rules. Only the saintly will successfully resist the rationalizations that their privileges are deserved.
The right policy isn't about matching abilities to responsibilities. The right policy is the one that gets the incentives right and gives people the freedom to choose.
"From my point of view this is extreme arrogance on Megan's part. She's a pledge to the club. She's learning the secret handshakes and various other rituals. It doesn't even occur to her that maybe some of us can see all of the benefits of membership and still don't want to join because we see something that the insiders don't. We see that the existence of the club itself is harmful to society regardless of who is running it or how it is run.
People are easily corrupted when they are allowed to play by a different set of rules. Only the saintly will successfully resist the rationalizations that their privileges are deserved.
The right policy isn't about matching abilities to responsibilities. The right policy is the one that gets the incentives right and gives people the freedom to choose." --Bearded, above.
Arrogance? I'll say! and, this, from one preaching EMH into, and at, the top of the most-recent Equity Bubble..
Good Going, MM~
Megan,
did it ever occur to you that by mailing sheaths of these 'assets' to every mail-drop in the US, people would find out, in a hurry, what these things were worth? better, it'd be an instruction, they've already paid for, in Finance that, even, Hartford couldn't duplicate..
No? Right, the wage-Slaves shant get too uppity, they Need to know their Place, and not much else, correct?
Sorry, but, yet more, Command & Control 'Realpolitik' isn't the Cure, it is, already, what ails this patient, the former u.S. of A..
Freedom, ringing, sets the tone of the working Marketplace.
Past that, registered comments is a good idea ~
Given that the underlying value of the assets is largely real estate, where local knowledge is valuable, I think there's reason to believe that individual investors would be useful to the price-discovery process.