Soros Steps Into the Gap

George Soros to the rescue?

Instead of just purchasing troubled assets the bulk of the funds ought to be used to recapitalise the banking system. Funds injected at the equity level are more high-powered than funds used at the balance sheet level by a minimal factor of twelve - effectively giving the government $8,400bn to re-ignite the flow of credit. In practice, the effect would be even greater because the injection of government funds would also attract private capital. The result would be more economic recovery and the chance for taxpayers to profit from the recovery.

This is how it would work. The Treasury secretary would rely on bank examiners rather than delegate implementation of Tarp to Wall Street firms. The bank examiners would establish how much additional equity capital each bank needs in order to be properly capitalised according to existing capital requirements. If managements could not raise equity from the private sector they could turn to Tarp.

Tarp would invest in preference shares with warrants attached. The preference shares would carry a low coupon (say 5 per cent) so that banks would find it profitable to continue lending, but shareholders would pay a heavy price because they would be diluted by the warrants; they would be given the right, however, to subscribe on Tarp’s terms. The rights would be tradeable and the secretary of the Treasury would be instructed to set the terms so that the rights would have a positive value.

Private investors, including me, are likely to jump at the opportunity. The recapitalised banks would be allowed to increase their leverage, so they would resume lending. Limits on bank leverage could be imposed later, after the economy has recovered. If the funds were used in this way, the recapitalisation of the banking system could be achieved with less than $500bn of public funds.

UPDATE at 10/1/08 12:07:47 pm:

Here’s a Washington Post article from 2005 on Soros’ conviction for insider trading in France—ironically right next to a bit about Freddie Mac’s expanding loan portfolio: Soros’s Conviction Upheld.

A French appeals court upheld billionaire investor George Soros’s conviction for insider trading. Soros has acknowledged he knew about a Paris financier’s plans to take over Societe Generale in late 1988, but he denied that knowing about the raid influenced his acquisition of shares in the bank. Attorneys for Soros said he planned to appeal to France’s supreme court.

Freddie Mac’s Loan Portfolio Grows

Freddie Mac said its loan portfolio grew in February for the first time in seven months as loans increased by $7.26 billion, to $654.8 billion. The McLean-based federally chartered home mortgage company said that it agreed to buy $12.9 billion of mortgage loans and securities in February, up from $12.2 billion in January, and that the balance of its guaranteed mortgage bonds grew by $6 billion, to $1.22 trillion.

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