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.

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Comments (Archived):

  1. aweissman

    A Covestor for the Splurge, in effect

    1. fredwilson

      Maybe more like an ebay

  2. Jeff DiStanlo

    it would be interesting if there could be some type of provision allowing a third party entity to in effect bid on splurge transactions to not allow the govt to overpay. for example, it would be great if hedge funds were allowed to sell a certain amount of a security to the government for the same price the government is buying that security for from the troubled bank. if you see a lot of interest in that bidding activity at that price you can discover that the government is potentially overpaying for that asset. this is not fully thought out (obviously!), but just batting around the idea of how to get private information into the public bailout price to achieve a better outcome. thoughts?

    1. fredwilson

      We call that a “tag along” provision in the VC businessWhat a cool idea!

  3. andyswan

    This is so important Fred, and you’ve hit nail on head.The other thing that is necessary for a market is the participation of as many people/entities as possible.I see no reason why the Treasury of the United States should be allowed to pay more than 10% above prices offered by private investors for these debts…and I see no reason why the Treasury should be allowed to buy the debt at a price lower than ANYONE else is willing to pay.Simply giving Paulson an unlimited paypal account and freezing the rest of ebay users out of the process is by definition NOT going to lead to efficiencies and transparencies that taxpayers deserve.

  4. PKafka

    I get that some brave/smart/lucky people will end with real bargains during the coming fire sale. But isn’t part of the problem here that no one really has a good handle on what, exactly, the crap assets are? Not nearly as straightforward as buying a 80% occupied office building or a portfolio of light industrial properties from the RTC…

  5. kskobac

    This is a great opportunity for the US at large to learn about investing – the US Government should be using this time to teach us all about risks, investing, returns, everything they can as they put a nation-wide contributed sum of money to work. I hope the US government is paying attention to people like you and Mark Cuban, who have been pouring out intelligent recommendations for the use and management of the funds almost daily.

  6. LeeHoffman

    Mark Cuban suggested last week that the government create an ETF with the assets in order to create the transparency you’re suggesting: http://blogmaverick.com/200…There are problems with this though (mainly that it will be politically disastrous, and thus unlikely to happen): http://www.squawkingtech.co

  7. gregorylent

    don’t you think this is all a setup so that the same kind of people as you quote above, jlm, can get a lot of assets transferred their way very cheaply? who can explain washington mutual’s 300 billion going to j p morgan for a billion 6? what am i missing? looks like business guys carving each other up, and putting one over on the government at the same time. forget “the people”, they are of no concern.

    1. fredwilson

      You could buy these crap assets tooIt’s a market

      1. gregorylent

        i have been feeling it is not an honest market … that is only a naive emotional response, a business person shouldn’t let emotion get in the way of a deal … though the result of such thinking is clear for all to see

    2. andyswan

      The only conspiracy of any material impact in this entire mess was the conspiracy between Congress, ACORN, Presidents Bush and Clinton, the Federal Reserve and Fannie/Freddie to:1) Intimidate banks into making loans that did not qualify on their own2) Dramatically alter the requirements (regulations) for achieving a loan3) Price-fix the value of these horrible loans, rebrand and repackage them4) Now swoop in, blame Wall Street and conspire to put the whole damn system under Federal Government control.THIS is what you get when the government actually believes that it has a role in “promoting affordable housing”.Now just replace the word “housing” with ANY OTHER WORD and you have a glimpse into the future of that industry: Healthcare, College, Energy, etc.STOP VOTING FOR HANDOUTS!!!!!

  8. John

    I wasn’t aware that the IMF has studied the failure of banking systems in 42 countries and how the crisis was handled. See this article:http://www.guardian.co.uk/c…Quite frightening.

  9. vengroff

    I can’t help but wonder how buying the toxic assets became the core of the splurge proposal. The biggest problem is credit. I think a convertible bond based approach could be a better solution for addressing credit, market pricing of the toxic assets, and taxpayer interest in the recovery upside. Details at http://www.plane-b.com/2008

  10. Scott Rafer

    RogerE also puts it nicelyhttp://www.informationarbit…

  11. pangaro

    here’s a colleague’s perspective:$700B needed? There is another way to get it.The $700B “bailout” is something we’ve all been asked to swallow — including those of us, the vast majority of Americans, who aren’t that wealthy and who didn’t make our money from the huge shift of capital from “Main Street” to “Wall Street” over the last 20 years. We’ve heard that there’s no way to “get it back” but actually there is — a one-time wealth tax.Let’s amend the congressional bill to impose a one-time tax on the wealthiest Americans and contribute it toward the $700B. Why not figure out who to tax — say, individuals of net worth above $10M, just a starting guess — and also how much to tax them — say, 10% — so that ONE-HALF of the $700B comes from the individuals who have been taking our money.This would be a return of capital from those who took it, back to those it was taken from.Why not?You might say this would never pass in legislation. But is that a reason not to talk about it?

  12. TMC2K

    The discussions here have been some of the best on the internet on this subject, I borrowed your term on my sparse personal blog. I copied the text of my post to your comments:http://blog.thommccann.com/…The Splurge is dead, long live the Splurge.Our so-called ‘leadership’ in Washington is tripping over itself to put taxpayers at risk for the debt incurred by government’s willful negligence in the housing bubble. The Bailout Splurge is not selling, for good reasons. (Hat tip to Fred Wilson for coining the term ‘Splurge’). The collective intelligence of the American people is once again exceeding the low expectations of the politicians. But in the early hours of October 1st the Senate is pushing forward another proposal.The American public understands that $700B is an insane amount of money even with the most detailed plan. Our Dear Leaders, have not offered that or an explanation of how we got into this mess. And without regard to a solution to the problem, the politicians have acted like fighting children without supervision (although that might be an insult to unsupervised children (even the ones fighting). With the these folks as the doctor, we are at serious risk that the cure is going to worse than the disease.To be sure, this proposal has improved in many important ways since it’s introduction just two weeks ago. But as one of the presidential candidates recently stated, “you can put lipstick on a pig…”. There is something about the Secretary of the Treasury asking for $700B that gives a totally new meaning to ‘bank robbery’. This time the gun is pointed at the American taxpayer.Simple Helpful Measures Now!With proper leadership, there are measures with widespread support that could have been passed in the past two weeks. This would buy some time and calm some fears. While the following items may not be commonly understood, there is widespread agreement that these would be simple and helpful now.Flexibility: Change the accounting rule from “Mark to Market” to a more flexible rule during crisis Buffer Zone: Raise the FDIC insurance limits to at least $250,000 Private Investor Skin in the GameMarkets function best when there are many buyers and sellers. There should be a market mechanism to let private investors buy these assets at the price that the Treasury wants to pay. This will ensure private investor dollars are on the line first and will add much needed price transparency to unknown assets the Treasury is planning to buy. There is a huge amount of private capital on the sidelines now. JP Morgan (the bank) just raised 11.5B in 24 hours. Now imagine the money the top 20 financial institutions and private equity firms could raise to participate. It would take less than two weeks. It is in their collective interest because; those who have the most to lose from this, are…well…those with the most.

    1. fredwilson

      Good points, but I did not coin the word ³splurge², I just promoted it inthe blogs and on twitterI believe Bill Maher coined it