Henry Paulson, the Treasury Secretary of the United States (finance minister) has proposed his solution to support financial institutions based in his country.
Their solution is to authorize up to $ 700,000 million (€ 478,440 million!) For Mr. Paulson to decide which entities have problems and use these funds to buy problematic mortgage loans that are now in the hands of the designated entities.
Today, these entities are saying that, with the mortgage loans in difficulty they have in their books, suffer multimillion-dollar losses that are damaging their capital of these entities, their solvency and, as a result, their future.
I love simple plans, so we understand them better. This plan, with its 12 clauses, is very simple . More or less says that the money is given to Mr. Paulson, and he decides what to do with it.
The advantage and disadvantage of Mr. Paulson is that he is former President of Goldman Sachs. That means that he knows very well the financial markets, and their entities and professionals. That is the problem too, many of these are your friends.
The lack of detail of his plan gives Mr. Paulson a lot of power and, from what they have told us about the plan, they think of saving financial entities from the wrong decisions they have made , paid for by public money.
The only way to remove problematic mortgages from the books of financial institutions so that they do not punish the capital of these entities, is to buy it at the book price, that is, at the current price. We all know that these problematic mortgages are worth much less , which is why they are problematic mortgages.
It is assumed that, when these problematic mortgages are in the hands of the US government, over time their value will rise and that this value will affect the State. It is not known, since the plan does not talk about this.
On the other hand, this plan fails to comply with the two basic rules of any government aid, rules that we have already discussed in these pages .
When a private entity needs the salvation of the government, at the very least, the top executives of these entities should lose , that is, they should be dismissed and, also, those who won financially with their wrong business decisions should lose financially with the entry of the government. The management can be passed on to other professionals.
The second group that should lose when the government has to enter to save a private entity, are the shareholders of those entities.
This plan does not speak of who is left with the capital of these entities saved and, therefore, we have to think that nothing will change, the shareholders saved and the directors also.
If the government takes entrepreneurial risk by saving these entities, the government should benefit from the increase in the value of the shares that will result from this salvation.
This plan needs work, that’s why it’s costing to launch it.
Mr. Paulson needs controls and any government help should cost the entities that voluntarily access this help .