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Hank Paulson's Rescue Plan Will Screw You: Here's a Better One
Hank Paulson's plan will soon be rammed through Congress, likely with strings attached for "homeowners" and executive pay. Too bad, because the plan is flawed and taxpayers are likely to get hosed. Especially too bad because a much simpler plan would save the system without socking it to taxpayers.
The main problem with Paulson's plan is this: If the government pays as little for the banks' troubled assets as it should to protect taxpayers (i.e., the market rate), the banks will still be in trouble. Why? Because they'll have to raise humongous amounts of new capital to offset the losses.
Where is this capital going to come from? Paulson doesn't say.
Under the Paulson plan, the way this problem will likely be resolved is that the government will overpay for the assets--to "save the financial system." In the process, the government will also save two constituencies who deserve no protection whatsoever: bank shareholders and bondholders.
If, in the absence of a bailout, the banks were heading toward Lehman's fate, shareholders and bondholders deserve the same treatment as Lehman's (for equity holders, about 13 cents a share). Under Paulson's plan, these folks may survive merely skinned. Taxpayers, meanwhile, will pick up the tab.
So what's a better plan? Equity infusions.
If/when a bank needs capital, the government should provide it--in exchange for a fair equity stake. Knowing there is an investor-of-last-resort should persuade bank clients to stick around. The taxpayers will then own significant chunks of the banks and will therefore benefit from their recovery. Meanwhile, the folks who are directly responsible for all the crap on the banks' balance sheets--the banks--will still be responsible for sorting it all out. And their shareholders--not taxpayers--would take it on the chin.
And how do you get the banks to act fast on a plan like this? Put a cap on the amount of money you'll shell out. Perhaps the same $700 billion.
Specifically, the government should say, "We're now going to invest $700 billion in private banks. First come, first serve. And if you don't get here in time and you then run out of money, tough beans."
(For a similar view, see Paul Krugman's editorial today. The NYT columnist and Princeton professor thinks Paulson's plan is a disaster. Senator Dodd's counter-plan includes provisions for the government to receive equity in exchange for the bailout, which makes more sense. It will still require the government to deal with the toxic assets, though.)
See Also: The Critical Question About Paulson's Rescue Plan
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Thanks for the great info, we linked to your article in our Bailout 101 post at the CA NOW blog: http://www.canow.org/canoworg/2008/09/bailout-101.html
Shouldn't the very "need" for a bailout be predicated on the needy first having told their backers that they, the investors themselves should dig into their personal wealth and bail out their own institution, which by the way has been so very generous over the last decade or so...so, you know they have the wealth to do exactly that.
Then, once they can't squeeze the original profiteers, maybe then we should talk about bailing them out using tax dollars and government involvement.
People having placed theuir retirement investments into stocks and savings plans, has left their retirement money in control of these bankers instead of the government. The government os responsible to the people, but these banks are not. They are using public fears to obtain more liquidity, because they
have taken every cent they have and every cent they can borrow, to make foreign investments. They have been extremely aggressive and they have run out of available cash. ANSWER : Get it from the government to keep it going. In their desire to get world rich, they really need 40 trillion to cover all the desire out there for working capital. Their bottleneck is they are out of money. To solve this, they just need to liquidate some of their assets, and stop making these risky loans. In short, these guys need a serious shrink.
Here's one more. Turn that 700B over to the taxpayers who have the mortgages. They are to pay the mortgages off or down according to the amount of money each receives. After all, the money belongs to the people, right?
A limited plan like this wold restrain the finance houses to deal only with the mortgage problems. That would be good, especially when considering predatory loans, for people who could pay their mortgages otherwise. the finance houses could not use the capital they receive for other purposes, other than to relieve the mortgage problems.
As it is , they could use this bailout money for anything, and that is really what they want. They have been extremely aggressive in making risky foreign loans, and they really want the capital for that purpose.
It's amazing how Republicans will ignore the cries of the homeless, the poor, the starving, the uninsured, and those of us who are living hand-to-mouth, but when their wealthy buddies are in trouble, they suddenly become socialists.
Their hypocrisy knows no bounds.
It's not only amazing, it's appalling.
28 years of "trickle-down economics" have created the greatest wealth gap since the Roaring 20s. And they just want to keep up the failed policies of the past.
If I ever vote for another Republican, I will obviously have entered senility.
That just might work.
Do the balance sheets of all US banks have the "toxic asset" problem to the same degree? Is there a way to distinguish among banks and tailor a solution that distinguishes among them as well (i.e. some particularly reckless institutions are allowed to fail while others are not)?
Bank Holiday. Problem solved.
This was no accident, it was by design.
Fat chance of getting universal SINGLE PAYER HEALTH CARE, not health "insurance" which is more of the continual theft.
What do you think the Social Security COLA benefits will be next year? Do you think they will raise it 35% like the cost of living has gone up? Fat chance.
Putting Paulson in charge of the theft of public funds once more...fox meet hen house.
I totally agree that this was by design.
Just B ush saying Wall Street "got drunk", a few months back, and requesting no cameras on, is enough to erase any doubt they knew what was coming.
http://www.youtube.com/watch?v=bT29fq0slGc
Obviously I'm not a financial guru by any stretch of the imagination and not all that well versed on what would happen without a bail out of the financial institutions and like most have to rely on the Government telling it straight and that in itself is a scary thought.
If what I am hearing is being properly absorbed and the Bush cronies are all saying it will be disastrous for the investers why wouldn't they limit the buy out to just cover the investers to the investers and let the wall street criminals swim for it.
Likely I just have a simplified view of things and this wouldn't work so I will wait for someone to correct me on my thoughts.
How many of these Wall Street Robber barons with their Golden Handshakes and Golden Parachutes are In the DEMOCRATIC party?
ZERO.
Henry Paulson is bailing out a company that gave him 37 million dollars severance pay. Paulsons net worth is 700 million dollars. He once worked for Nixon and was appointed by Bush. This whole mess is a REPUBLICAN scam on the American people.
And now after getting totally screwed by these folks, WE get to pay for the rape kit.
Best line of the day.
And going to be paid for by DEMOCRAT CONTROLLED CONGRESS.
And going to be paid for by a REPUBLICAN CONTROLLED CONGRESS, WHITE HOUSE AND COURT SYSTEM FOR THE PAST EIGHT YEARS.
No one's buying the "Democrat congress is to blame" this time.
Just because a year and a half ago we citizens elected some Dems to congress to try and clean up all the Republican mess doesn't mean the mess is the fault of republicans. Dems have been STYMIED by an unco-operative White House and the REPUBLICAN CONGRESSIONAL CABAL ever since. But the number of messes that need to be cleaned up will take more than a year or so to fix.
REPUBLICANS OWN THIS MESS. SIMPLE.
Some talking point lying blame deflection games won't work this time.
Fool me once, uh, fool me, uh... aw hell... We don't get fooled again!
Wake up everyone, this plan is just another repug scheme to bailout the rich, well connected friends of Bush and McCain.
Like Raines....o wait
Yes, it does make sense!
After listening to Bloomberg yesterday, he seems to have a really good handle on this whole melt down. Would it not be a great idea to offer him the helm to steer this out of the woods? Paulson has always been way too close for comfort - is he able to be objective in these matters? I have my doubts.
I am afraid there are more simple solutions without sticking it to the taxpayer - YET AGAIN.
Bloomberg is in the bag with the rest of the financial "wizards". The crap he participated in to provide the new Yankee stadium at taxpayer expense should demonstrate that to anyone who really pays attention.
Yes, turn the problem over to Bloomberg, and impeach Bush and Cheney. If the Reps really want a solution, they should agree; this is a test of their honesty, and it's time it was tested, in plain view so we can all see where they stand.
I think the plan needs equity positions for buying the Sub Prime instruments. But the idea of bailing out foreign firms is not sound (you could invite other countires to participate if they want to bail out their own corporations). The idea of buying any thing other then the sub prime instruments in question is a whole
can of worms we don't need to open.
Congress must have oversight. And if I hear one more comment about Congress has to go on their vacation I'm going to kick their ...the problem has been just as much Congress lack of oversight as it has
been the Administration's lack of enforcement of any regulations.
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