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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Comments

[cyndeewi]

A much simpler plan is to loan the banks the money and make them pay it back the same way we have to. If they don't then garnish what the bank owns or anyone else they are giving the money to. The taxpayers will not be responsible for anything.

[freedog]

Exactly, you know so much about this situation, shoot, you should have Paulson's job..the guy is one of the most if not the most respected finance expert in the world. Use to run Goldman. You don't know what you're talking about.

[Zeje]

Paulson only cares about bailing out the banks -- making sure "the investment class" makes money

[vippy]

I am for all the CEOs that bankrupted a company to pay back their millions of dollars of bonuses,
that would be a start. Why are we compensating the incompetent? Anyone could have seen this
coming, why do they want to tell us they did not know. Schumer is against it now but he was
all for it when the banking industry was deregulated. All of them need to be replaced.

[margec]

If the problem is really the lack of liquidity - which will shut down the free operation of the markets and interfere with businesses' ability to get loans, etc. then why not make some amount of federal money available for NEW loans - to be administered by a federal government agency. The agency could hire some people with some sense and even make them accountable in some way, and they could then make judgments about the risk of each new loan. That way, the risk to taxpayers would be much more limited because the feds would be underwriting liabilities they can understand and that have collateral and a way to assess their value, etc. These brilliant overpaid folks holding all that bad paper would be free to figure out what to do with it while the rest of us go about our business...The dire emergency and short deadline is just a creative way to keep people from thinking too much about the problem; similar to what we've seen before from this crowd.

[oldfart1]

This is basically what FDR did, and it worked. Why not give it another try? Why trust the bankers who got us in this mess? There are lots of Demo housewives (but not Sarah, of course) who could do a better job.

And why such a hurry? The problem is 4, 5 years old. If Paulson is so brilliant, why did he just start thinking about such a critical problem yesterday?

[DiscoStu]

Why didn't Obama or Biden for that matter? Or all the super-intelligent Huffpo commentators? I think this is a repuglican Bushco site, masquerading as a moronic liberal democrat site. YOUR ALL IN THE TANK FOR BUSH AND MCPALIN!!

[Indie2008]

This has to be the biggest slight of hand trick in political history. This so called conservative Republican administration getting the American people to go along with this corporate welfare bailout, while attacking their opponents as "tax and spend Democrats." Who do they think is going to pay for all this?
It's time for a change. It may not be a perfect change, but I'm willing to take my chances on this one.

[DiscoStu]

And getting the 2 senators running for president and vice-president to go along with it. BUSH CONTROLS EVERYONE.

[tsloan]

It's good to be king.

[tsloan]

When does Paulson get his black top hat and monocle?

[eddiebly]

That was really funny but I'm too p i s s e d to laugh at what is happening to Americans.

[DiscoStu]

Look on the bright side- some people in third world countries are watching their children starve to death. You only have to watch the spectacle of presidential elections.

[tsloan]

This is beginning to look like that fun board game M O N O P O L Y by Parker Brothers.

[OhioJan]

We got a lot of work to do here, Nation, let's git 'er started!!!!!


Contact List:

Contact Pelosi: http://speaker.house.gov/contact/
Contact Reid: http://reid.senate.gov/contact/index.cfm
Contact Obama: http://my.barackobama.com/page/s/contact2

Find Your Senator
http://www.senate.gov/general/contact_information/senators_cfm.cfm

Find your Congress Critter
http://forms.house.gov/wyr/welcome.shtml


THEN, when you're done with those folks, SIGN THE PETITIONS!!!:


http://www.democrats.com/stop-paulsons-plunder

http://act.credoaction.com/campaign/no_blank_check/?r_by=912-1591685-lTuvLDx&rc=paste

We need to do what WE can - NOW - to prevent any more of the shrub's crooked-cronyism to further destroy our Country!!!!!

[RickO]

Paulson's (Bush's) plan is nothing more than a parting gift for the party loyal.

[peterg76]

The problem is not a lack of suggestions. Everyone - even the dimmest members of Congress - knows perfectly well that the the "bailout" is not about helping taxpayers. That part is not accidental.

[WASanford]

Let me point out that none of this would have occurred had we not revoked the Glass-Stiegel act in 1999. Just 9 short years later our financial sector is melting down. Lesson learned?

Before doing anything, take a good look at FDR’s Home Owner’s Loan Corporation (HOLC) that was established by the Home Owner Refinancing Act of 1933. Along with the Glass-Stiegel act it worked well for us for over half a century! Before doing anything else, brush the dust off of these bills and put them back in force. Use the $700,000,000,000,000, if it would cost that much, to refinance the toxic mortgages that are causing these foreclosures. You’re much more likely to gain the acceptance of Main Street doing that than if you just gave that much money to the current administration.

Tell the gamblers on Wall Street to settle their losses as best they can, and let’s get back to rebuilding our country.

[jake1492]

Equity infusion in the banks is fine as part of the solution... but along with the equity infusion needs to be mortgage reduction for those motrgages which reflect the excesses of the housing bubble. There has to be real loss to the holdings of the financial institutions beyond the money being added by the government and for which equity is being exchanged. In addition, the total of the banks' loss and the government's contriubution, both of which must reduce the outstanding amounts on mortgages, must be less than the actual loss in value of the homes that are mortgaged. In this way all three stake holders... the banks, the home owners, and the government (the public) share in the pain in a way that allows the mortgages to continue to perform.

Anything less is a corrupt wealth tranfer that does not pass the important test of being fair.

[Excander]

How is it that the Credit Rating Agencies responsible for appraising the credit worthiness of these securities were issuing AAA+ ratings to them?
The notion that these are "incredibly complex derivatives" and that no one could of seen the fall in value of these derivatives is a LIE.
If these derivatives are so complex how could the credit rating agencies understand them to rate them AAA+?

Generally,
Fannie and Freddie are allowed by law to lend at approx. a 1:10 ratio, assets to debt. This means that they can loan $10 for every $1 they hold as assets. They would sell thier $10 in loans allowing them to issue $10 more in loans to the public. Wall Street was buying these loans and selling them off as derivatives. In the market place, you now have $1 worth of assets backing $20 worth of debt. Repeat this a few times and the securities being sold have no tangible assets backing them. They are JUNK. Illusionary Fiat value which is completely overleveraged.

And your telling me that this was unforseable? This is one of the biggest frauds in our countries history, on par with the two wars we are currently fighting.

Who's going to jail? O yeah, no one. More accurately, as the economy for us serfs spirals downward, and crime rates increase, people down the food chain will be going to prison. Serves us right for being so stupid.

[Yermammy]

They're building huge "holding" compounds now, all over the country. Search it out.

[TheIndependenceParty]

Paulson says no equity stake. http://www.cnbc.com/id/26836295 Seems to me the negotiations should adjourn for now, until Bush and Paulson come to their senses. If the firms are still around next week, or whenever they agree to this absolute requirement, ... perhaps we will buy them up then. If not, we'll turn down the thermostats, park the cars, and wait them out.

To the Democratic Congress, ... don't get weak knees on us now or it may well be the last bill you pass in office! This will either become your legacy, for better or worse, or your political epitaphs!

[ched]

ANY plan to rescue investment banks presented by Paulson, the once and future king of the biggest investment bank, Goldman Sachs, is doomed to fail.

NO ONE will believe that any plan presented by the ultimate insider in the most venal, rapacious industry in the world will be anything but self-serving. And they will be right.

DON'T CAVE, CONGRESS. The Wall Streeters are in a panic. Their cronies in the oil and military industrial businesses got theirs; now the money people want what they feel is theirs, too - our money. Only problem is, just as the sun is about to set on their 8-year raping and pillaging period, all their bets are turning to sh*t. T'ant pis.

So the Bushies are engaging in their last, best, shock doctrinaire effort to stick their middle finger right up our collective anal cavity, in hopes of pulling out a bunny.

No questions allowed. All sales final. Immunity all around (unless, of course, you're one of our customers, in which case, pay up, bitches).

[Cannongrape]

This may be magnitudes worse than we think. If these "assets" we are buying are derivative contracts, the actual cost to the taxpayers may be 20 to 30 times 700 billion. Did I just write "billion"? Goodbye, dollar, goodbye, America.