(Clusterstock) Yesterday news broke in the Wall Street Journal that executives from mutually held, family-owned and other private banks were lobbying Treasury officials for a slice of the federal financial rescue pie. If the Treasury Department officials are paying attention, they should immediately start demanding bigger equity stakes that pay higher dividends in exchange for taxpayer money. Right now it looks like the government is overpaying for its stakes in banks.
It’s always been clear that government assistance was cheap. In exchange for billions from the government, banks have surrendered non-voting equity stakes that pay dividends about half as expense as investors were requiring in private transactions. Sure there are a few extra bells and whistles about executive pay but most of those were likely to be enacted into law anyway.
Now we know it’s too cheap. When thousands of otherwise healthy banks are lining up for the funds, willing to give up equity stakes and pay dividends to the government, we know that the price extracted for the bailout bucks is too small. Healthy banks wouldn’t be eager to get on the gravy train if it was priced correctly.
Think about how far we’ve come from when the plan for the government to buy stakes in banks was first announced. Back then, banks were depicted as reluctantly taking the money. A few banks were said to have initially balked at the terms. Now banking executives are hiring lobbyists to get themselves on the bailout list.
It’s always hard for the government to price anything. Government officials lack profit incentives, the money they spend is expropriated from taxpayers and market processes that allow private businesses to pick up price signals break down. This creates a calculational chaos for government officials. In socialist countries, government officials trying to decide whether they needed to price a product higher or lower were sometimes reduced to looking at how long the lines had become.
Well, the news about privately held banks lobbying for access to federal funds should be the indication that we’re providing aid too cheaply. Treasury officials should stop overpaying for these equity stakes and begin requiring bigger stakes and higher dividends until fewer healthy banks look at the taxpayer as an easy mark for cheap money.