Relevant:
2008-09-27 — blogspot.com
If WaMu had been placed in liquidation I am pretty sure the seniors would have got something. If the senior debtors had been allowed to conduct an auction for WaMu (compromising all the junior stuff including the prefs I owned) then they would have got something.
...
... the future of WaMu was uncertain. They clearly had plenty of losses coming at them. The company estimated those losses as 19 billion. JPM has estimated 31 billion. On both those numbers incidentally the senior debt holders in WaMu should – in an orderly liquidation – be made whole. Get that – on JPM’s own numbers the senior debt holders should have been made whole – and yet the rights of these debt holders were confiscated.
...
The OTS/FDIC carried a risk – the risk being that the losses would be so large that would wind up costing the government money.
The government solved its problem – and it did it by taking away the rights of the senior debt holders to an orderly liquidation – when on the numbers given by the ultimate acquirer the senior debt was likely to be whole or near to whole.
...
It gets better -- unintended consequences to follow:
Now there is not much raising of wholesale funds by banks at the moment. But after this deal there is likely to be less. It is simply the case that there is now a new risk for people who provide wholesale funding – and that risk is that the government will unilaterally abrogate their rights – without appeal, without due process and without accountability.
In the process the OTS and the FDIC have effectively removed the main low-cost source of funds of pretty well all banks in America. They will have put the fear-of-Government into such people globally.
This is why direct "nationalization" of Wall Street is bad -- it becomes a self-fulfilling prophecy through which markets are dismantled in an accelerating manner, necessitating even more government support (even if that support is only "soft" backing and rule-changing that favors another nominally-"private" market entity, like JP Morgan).
Indeed; now there's this: Wachovia suitors may play hard to get, eyeing the JP Morgan / WaMu model:
``WaMu's takeover has proven that there's an easy way, if the FDIC is involved,'' said Sean Egan, president of Egan-Jones in Haverford, Pennsylvania. ``You kick the hell out of the equity holders and bondholders. That may be the new model for bank takeovers.''
This is horrible. Now we have neither orderly bailouts nor orderly bankruptcies. The government is plunging the markets into outright chaos.
Incidentally, Paulson surely must have considerable Treasury security holdings in his "blind trust". Bet those are doing well these days.
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