Suspend your imagination for a moment and imagine that Treasure Secretary Paulson is a one time successful entrepreneur who is coming to a VC looking to raise money for his next venture. Perhaps that conversation would go something like this:
Paulson: So, I’m here to raise $700 billion dollars for my new venture. I see a unique opportunity in the marketplace of which I want to take advantage. I have built out the business plan, and am here to raise some money.
VC: OK. So what’s the idea?
Paulson: I want to invest in some mortgages.
VC: Interesting. And how do you plan to make money?
Paulson: Didn’t I cover this already? I have a business plan.
VC: But we haven’t seen the business plan.
Paulson: And you won’t.
VC: I see. Do you need all this money at once?
Paulson: Not really.
VC: Why are you asking for it all then?
Paulson: These are uncertain times, and I need to give the appearance that I have money.
VC: Oh, I see. Do you have a plan for how you are going to use the money?
Paulson: Yes, I plan to make money with it.
VC: And what do I get for my money?
Paulson: <irritated> Business plan…
VC: What I meant to ask was whether I will get equity in this business?
Paulson: No.
VC: No upside for my money.
Paulson: Yeah, not really.
VC: Interesting. Do I get a board seat?
Paulson: No.
VC: Any controls?
Paulson: Nope.
VC: No oversight?
Paulson: None. Oh, and you have 2 days to make your decision.
VC: Well, that’s quite a bit of money, and not a lot of time. Are you speaking with other investors?
Paulson: Nope. You guys are the only game in town, but if you don’t invest now, you won’t see this opportunity again. I will walk right out the door.
VC: And go where exactly?
Paulson: The door probably leads outside, no? Listen, you look like a nice guy. Let me share a little bit of my business plan with you.
VC: That’s pretty optimistic. How accurate and or robust is your model?
Paulson: I can tell you this much…it’s better than the ones used to value the mortgages in the first place. We actually handle a 10 sigma event. We even went so far as to model an 11 sigma event, but that won’t ever happen.
Of course, I say all this with my tongue placed firmly in cheek, but I have to say, I am pretty surprised at the evolution of this package and the discussion around it. I want to be very clear on my economic viewpoint: liquidity and credit availability in the market are absolutely critical right now. However, if the American public is going to take on the role of investor, there should be a well thought out plan, controls, and upside participation. Huge risk with little upside is hardly a good investment. Why is it that Warren Buffett is the only investor who can negotiate a great deal? The bailout package is being sponsored by an entity with vastly more money in their coffers than Mr. Buffett. It’s a funny thing, the way deal making is supposed to work - when you have the money, and the other person needs the money, and they need it very badly, you are generally in the better position.