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Minyan Mailbag: Money Must Return to Banks, Commercial Paper Markets

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But investors need someone to lead them.

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Minyan Peter,

I see this morning that the UK Government is now going to put Tier 1 capital into its banks.
Isn't that what you were pushing the US to do yesterday in your article?

Minyan JD


Minyan JD,

Yes and no. First, I think Gordon Brown is to be commended for showing leadership here - and Tier 1 is certainly the right place.

But -- and not to be too obtuse -- the form and amount of Tier 1 capital is what really matters. As I read it, what the UK is proposing to buy is preferred stock. And while this is technically Tier 1 capital (the best kind), in a liquidation scenario, preferred stock is senior to common. And by going in at this more senior level, the UK government is essentially admitting that bank liquidation is still a possibility. To me, that's not a helpful market message.

As an aside, it's why I take such issue with Warren Buffett's investments in General Electric (GE) and Goldman Sachs (GS). He demanded preferred stock and then, based on his "endorsement," both companies turned around and sold common stock (below Buffett) to John Q. Public.

What Buffett ended up with was a heads I win, tails you lose investment. While great for Berkshire (BRK-A) investors, it isn't great for Main Street investors who don't understand the difference - and who are likely to see losses before the cycle bottom is in.

What the market needs right now is leadership at the absolute bottom of the capital pile. And whether its Warren Buffett, sovereign wealth funds, private equity funds like TPG, or the investors in last night's $10 billion common issue for Bank of America (BAC), the market is saying one thing loud and clear: "It's not going to be me." And the reason they aren't going to go in at the bottom is because they're afraid (and rightfully so) that it's going to get worse.

To me, this is where the public sector can and must play a huge role -- going in where others won't -- until the market sees that the bottom is in.

Will the government lose money? Absolutely. But the absolute price paid will be far less than what will be paid under all of the various guarantee programs that the Federal Reserve, the Treasury and various global central banks have put out there.

Furthermore, and most importantly, by going in at the bottom (especially with commitments to keep the capital coming), the government builds a foundation under which private investors will quickly come forward with preferred stock, subordinated debt, senior debt and deposits.

If we want to solve this credit crisis soon, that's what needs to take place. We need private investors to start pulling money out of Treasuries and Treasury money market funds and to put it back into banks and the commercial paper market. But they need to be led by someone.

History says we can either wait years -- like Japan did -- for the bottom, (and, for what it's worth, I believe that at the bottom Warren Buffett will buy common stock, not preferreds) - or the government can accelerate the process and step up now.

As I wrote yesterday, "bad news doesn't get better with age." The sooner we deal with this crisis, at its nastiest core, the faster we'll come out of it.

And as a US business owner and taxpayer, I'd rather get on with it.

-Minyan Peter
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