Silly me, I thought it was a good thing that Hank Paulson insisted on more or less wiping out the shareholders of Fannie and Freddie. But now the estimable Anatole Kaletsky of The Times makes the counterargument:
By deciding essentially to wipe out shareholders in Fannie Mae and Freddie Mac and acting even more harshly to the shareholders of Lehman Brothers this weekend, Mr Paulson has sent the clearest possible message to investors around the world: do not buy shares in any bank or insurance company that could, under any conceivable circumstances, run short of capital and need to ask for government help; if this happens, the shareholders will be obliterated and will not be allowed to participate in any potential gains should the bank later recover.
This punitive policy towards the shareholders in Fannie, Freddie and Lehman, who had put more than $20billion of capital into these companies in the hope of keeping them alive, means that no US bank or insurance company can hope to raise any extra capital in the foreseeable future.
It’s not quite correct that Frannie shareholders won’t “be allowed to participate in any potential gains should [the companies] later recover.” As I understand it, they’ll get anywhere from 20% to 100% of the potential gains (the ratio depends on how much capital Treasury has to put in), minus some big fees to taxpayers upon the companies’ hoped-for return to health. And is Kaletsky really saying that what we need are a bunch of government bailouts of financial institutions in which shareholders aren’t punished?
Still, he’s right that hardly anybody seems interested in putting any money into financial companies these days. Which could eventually force Treasury to drop its no-bailout policy for a bail-out-everybody policy. Just like (regular readers will have suspected that it would eventually come to this) Sweden!