Friday, October 10, 2008
pros and cons of direct capital injection
--the favored mechanism involves the purchase of of high yielding preference shares, as Warren Buffet did at Goldman Sachs and General Electric. For government it creates significant problems. --the stumbe of AIG had a chilling effect. Fed annouced Thursday night that AIG had burned around 70.3 bil of the 85 bil loan. A second loan of $38 bil for AIG was extended. But poeple raised the queseiton how deep is this hole. --as a minority voter, Fed is able to boss around senior managers. This may intervene the company's normal execution and efficiency. --a question will be raised is how much capital is needed for each company. The market cap of US financial coporations are close to 4 tril. But we only have 700 bil, that might be needed to bail out other nonfinancial companies, like GM... --yet this approach might be superior to Tarp program. We are running against time. Without swift action, the market confidence will be dead soon. Tarp program will take months to take effect. It seems impossible to stop the market slide. --Under Tarp program toxic assets might be sold at discounts. If the discount rate is higher than a selling company's marketdown rate, the company will have to further write off some capital. This seems ineffective compared to direct capital injection.