We Need Price Transparency In The Splurge
I got caught up last night and this morning on the splurge legislation. My favorite summary was from Henry on Clusterstock. In that post, Henry wrote:
The Treasury has complete discretion over the prices it pays
for crap assets (the most important provision in the whole document as
far as the taxpayers are concerned). "The Secretary make such
purchases at the lowest price that the Secretary determines to be
consistent with the purposes of this Act." Translation: If the banks
persuade me they won’t sell for anything less than a sweetheart price,
I can give them that price. The only good news: The Treasury has to
publicly detail the prices it pays. So if the Treasury is paying
grossly inflated prices, the taxpayer has a chance of finding out about
I was very happy to see that part about public disclosure. The pricing of the splurge transactions is what many of the smarter people I know have been focusing on. Paulson was very careful in his testimony to be vague about this very point. They want the flexibility to pay what they need to pay for these "crap assets" as Henry calls them.
One person’s crap asset is another person’s bargain. And I believe that, like with the RTC, many investors will make a killing buying these crap assets. This was my favorite comment in the entire discussion of the splurge on this blog last Friday (and what a great discussion it was/is). In that comment, JLM says:
Sometimes a bit of historic perspective is useful in trying to deal
with TODAY. Remember that quote about being doomed to relive the
history we ignore? Well we are not being very thoughtful about this. We
have actually seen this movie before though maybe it was a shorter
Remember the S & L crisis and the Resolution Trust
Corp? I do because I hit a very, very good lick in purchasing
distressed properties from the RTC, pension funds, insurance companies,
banks and S & Ls. I bought them for $0.20-0.30 on the dollar of
replacement cost, fixed them up, owned them for about 5-7 years, had
the numbers audited annually and sold them all to institutions in 3
transactions in 1995 — 6,000 apartments, 100 warehouses, 7.5 MM sf of
My partners were the likes of GE Capital (for whom I
also fixed up some of their problems), Fidelity and private foreign
investors. BTW, GE Capital is the smartest bunch of real estate folks I
ever met and the best risk takers a partner could ever have hoped for.
And they made a ton of money in the deal while conducting themselves
like perfect partners and gentlemen. Private money jumped in big time!
I’ve heard that the hedge funds who made the most money on the "short subprime trade" have largely unwound that trade and are starting to nibble at the very mortgages they bet against a couple years ago. That’s a good sign and this splurge is going to allow them to do more than nibble shortly.
So, here’s the point I want to make. I would like the splurge legislation to require that we not only have public disclosure, but that we have in effect a real time listing (like the Nasdaq) of all splurge related transactions. This is good for the public (so we know what’s going on with our money) and it’s good for the Treasury (so it is forced to behave rationally) and it’s good for investors who want to profit from all of this splurge activity. It will also allow us, after the whole things is over, to analyze the splurge and learn from it, like JLM learned from the RTC.