Steve Wynn On The Bailout

Interestingly, Steve Wynn condemns no one, but is still against the bailout:

Steve Wynn: I think I understand the nature and the heart and soul of the liquidity crisis we face. I believe we got there because good business self-interest and good business sense got out of line and incorrectly focused. If you were a financial company, it became very good business to do as many deals as possible with as much volume as possible, because most of the companies were making a spread. There was a very unusual situation in our country where credit could be passed on from a lender to a third party. I am speaking of investment banks, savings and loans and regular banks. They could print paper in the form of a home mortgage or financing for the acquisition of a company and that sort of thing.

And that paper would be resold after big fees were charged to investment funds and mutual funds and all of the other pockets of money that are created in our economy by 401ks and pension plans and things of that sort. There is this huge cash flow of money every month that goes into funds that have invested in them to fulfill their charters. And in the case of home mortgages, it was the Mac and the Mae. And there was encouragement for everyone to do this. First, politically from the government, Mac and Mae were encouraged to give everybody in America a home.

Secondly, this ability to pass on a credit. The bigger the credit, the bigger your fee, the bigger your bonus. And every intelligent business person in the world did exactly what any other intelligent business person would do. They did bigger deals for more fees and more bonuses to make more money for their enterprises and themselves. They resold these things to funds or to the government until everybody was so filled and so out of cash that it started to back up on itself. When the music stopped, there weren't enough chairs for all the people holding the paper.

The liquidity crisis was exacerbated by the fact that banks and savings and loans are regulated by law in terms of the equity they have to keep in their reserves. So agencies step in and shut them down, or they are completely trapped by insolvency: The liquidity crisis takes its toll.

These were not stupid people. These were not greedy people. They were just people acting naturally. One of the groups acting naturally were all of the folks who wanted a home they could not afford. Or the folks who had a home and got a phone call from some dope telling them their home was worth twice what they paid for it (without seeing it or knowing anything about your neighborhood) followed up by another dope calling saying, based on that appraisal, "I will loan you 100% of the money." This allowed the home builders, in effect, to conduct an auction and say, "Pay $400,000 for this $250,000 home or four other people want to buy it. Why not? It's no money down."

There were no victims here. They were people caught up in a short-term explosion of unfocused self-interest. Short-term thinking. They borrowed long term and invested short term. It was the consumer public, the home buyers and the home lenders, and the politicians who encouraged everybody that prosperity was unlimited. It was a great weekend party and there was no Monday morning. Now we come to this.

Well, I hate to disagree with politicians, but it wasn't greedy, nasty, dishonest people who did this. This was anybody who borrowed from a bank for a price they could not afford. They were not greedy or dishonest. They were acting in a very instinctive and human way. Discipline had been removed from the system, and intelligence was perverted or misdirected. And now is the time to fix it, and you fix it in the same place it happened: in the communities at the root of the problem. It is too big a bundle of stuff to hand over to the government in mass by having them buy it.

Q: You mean the mortgages?

A: Yes, the mortgages. Government can't handle it. It is too complicated and it is too tricky. They will misprice it again and create another problem down the road. These things should be ironed out by people on the ground. Pretend this is a failed savings and loan association where the executives could not handle it and got confused. The government steps in with a proffered that is designed to meet the minimum amount of the liquidity needed to preserve the enterprise. The equity provided a proffered stock can be leveraged at 4, 5, 6 or even 7 times to 1 and so they start lending again.

But the proffered has teeth in it. It says that all loans made hereafter will have a certain equity to loan ratio, that the loan amount must be limited to a certain percentage of the monthly established income of the lender, that there cannot be a 100% loan on an asset, and that nothing but plain operating expenses and minimal salaries are to be paid to every employee including senior management and directors until and unless the proffered dividend is paid to the proffered shareholder.

This equity on the proffered is perpetual for a very important reason: It gives government a chance to decide how much it wants to be paid when redemption time comes around. Normal proffered carries a redemption time period of like 10 or 15 years. But this proffered is perpetual, which means the seller of the proffered, in this case Uncle Sam, the taxpayers of America, get to decide what we want.

Now, what happens is that all the loan executives have to eat the loans. They have to write them off, which means their stock goes through the floor. Then one thing will always happen: Somebody will evaluate the enterprise as a whole and understand that under a worst-case these homes are worth 2X and I can buy them for 1X and purchase the stock. He will buy this savings and loan and run it efficiently with new management and he is totally incentivized to pay off Uncle Sam. He doesn't want to have the proffered over his head. He wants to declare a dividend. He is going to make it worth enough to buy back the proffered so he can get his hands on the real money. And every one of these loans has a value. It may be 40% of what it was issued at or it may be 60% or 30% of it or maybe 20%. But there is value.

But to say that Uncle Sam can sort through hundreds of billions of dollars of these things and price them properly is one of the most immature, unsophisticated judgments anyone can make. Have I clarified my position for you?