From Medicine to McKinsey to Main Street: Wall St. Welfare: Bailouts serve as taxpayer blood in the water for Wall St sharks

Wall Street taken above steam stack road works.

The best traders are similar to cornerbacks in the NFL...they operate on an island and have poor memories. Instead, they play each play to gain the greatest possible advantage, no matter what the last play held.

As the financial sector crumbles and institutions tumble, the American taxpayer has been set up to take the bag, supposedly for the national good. And what impact does that have on those who've created this falling house of cards? These sharks see blood in the water and are each seeking to extract a new chunk of taxpayer flesh.

The NYTimes has an excellent article on the entitlement mentality of Wall st

Even as policy makers worked on details of a $700 billion bailout of the financial industry, Wall Street began looking for ways to profit from it.

Financial firms were lobbying to have all manner of troubled investments covered, not just those related to mortgages.

At the same time, investment firms were jockeying to oversee all the assets that Treasury plans to take off the books of financial institutions, a role that could earn them hundreds of millions of dollars a year in fees.

Nobody wants to be left out of Treasury’s proposal to buy up bad assets of financial institutions.

“The definition of Financial Institution should be as broad as possible,” the Financial Services Roundtable, which represents big financial services companies, wrote in an e-mail message to members on Sunday.

The group said a wide variety of institutions as varied as mortgage lenders and insurance companies should be able to take advantage of the bailout, and that these companies should be able to sell off any investments linked to mortgages.

The scope of the bailout grew over the weekend. As recently as Saturday morning, the Bush administration’s proposal called for Treasury to buy residential or commercial mortgages and related securities. By that evening, the proposal was broadened to give Treasury discretion to buy “any other financial instrument.”

The lobbying became particularly intense because Congress plans to approve a package within just two weeks, without the traditional hearings and committee process.

Clearly there's profit in the air and financial firms are looking to extract as much value as possible. Which is why, we the taxpayers, should not let that happen as they try to extort us in the cleanup of their own mess.

There are several principles that we should stick to, including avoiding free riders and receiving transparent valuations even if we inject some liquidity into the markets.

From Roger Ehrenberg's Information Arbitrage:

investors are expecting a bailout of institutions deemed "too big to fail," with benefits flowing directly to those firms' equity holders instead of the U.S. taxpayer who is providing the funds. This is clearly at odds with free market principles, as the common stockholders become "free riders." Does this need to be in order to stave off financial catastrophe? I'd say not. And whoever says this is the case has something to gain, like being bailed out from poor investment decisions. Those at Treasury, the Fed and Congress: JUST SAY NO.

Buying assets at anything other than fair market value is against every principle we should be enforcing. Transparency. Accuracy. Full disclosure. This is a non-starter. Who cares where the assets are carried on a firm's books? If Morgan Stanley has them at $.30, Merrill at $.32 and Goldman at $.50, this is not the point and should play no part in the analysis. There should be a reverse auction to determine price, with the Treasury buying the cheapest and moving up the line. Depending on where firms are carrying these assets, it might require a write-down that would threaten its solvency. If not, great. The firm has liquified the assets and the U.S. taxpayer gets the upside over time (monetizing the liquidity option, in my parlance). However, if there is a capital gap I'd suggest that the Treasury gets issued convertible preferred stock on attractive terms, supporting the firm in its operations while substantially diluting common equity holders. In this case jobs are saved, the institution continues to operate as a smaller, leaner, hopefully more prudent firm while the U.S. taxpayer, once again, owns the liquidity option.

Remember, at the heart of the problem is that there was too much cheap capital in the market. While we don't want all capital tied up, investors will adjust to a level of risk in the marketplace and seek places to grow their money. Our problem is that too much capital was too readily available and people lost an appreciation of risk. Bringing cheap capital back and rewarding stockholders by giving them a mulligan on the risks they chose is the wrong answer. Ultimately, all money managers would lose their jobs if markets remained locked indefinitely. They'll make sure that doesn't happen.

In the end, it will be painful as market trading and valuations return to levels that appropriately reflect the fundamentals. The system built on outsized valuations and unreasonable leverage multiples needs to die...and I'll be aghast at any taxpayer money wasted in the attempt to save the mansions of those who want to continue to feed off the carcass of a failed system of bubble finance.