Thursday, October 9, 2008
John Paulson's Plan
"There is a better alternative to stabilize the markets: Invest the $700 billion of taxpayer money in senior preferred stock of the troubled financial institutions that pose systemic risks. ... When financial institutions borrow massive amounts of money to invest in assets that are now found to be illiquid are poorly performing, it is not the responsibility of taxpayers to bear the resulting losses. Thse losses should be borne by the shareholders. ... This mechanism--purchases of senior preferred stock with warrants in troubled institutions--addresses the problems with the Treasury plan. ... The only difference is that potential losses are kept with the shareholders where they belong. ... By allowing banks to sell their worst assets to Treasury at inflated prices, taxpayers would be subsidizing healthy banks which have access to private capital (Goldman Sachs, J.P. Morgan, Wells Fargo, and Bank of America, for example) as well as banks that don't have an alternative. But under a preferred plan, only banks that don't have a private alternative will be given federal assistance", my emphasis, John Paulson (JP) at the WSJ, 26 September 2008.
JP is a hedge fund manger who made $3.7 billion betting on the current crisis, JP's plan was similar to mine, see my 4 October 2008 post. Was Henry Paulson unaware of JP's suggestion? I don't think so. Yet he did not adopt JP's plan. I can't help but wonder how "healthy" Goldman Sachs really is. Look at Goldman's Buffett deal. Why was it made?