As featured on p. 218 of "Bloggers on the Bus," under the name "a MyDD blogger."

Monday, February 02, 2009

Financial Execs Still Playing Gimme Gimme Gimme

Paul Krugman says what needs to be said about these reports that the Obama Administration, which is really miffed about bankers frittering away bailout money on bonuses, will nonetheless fritter away more bailout money on the banks:

Question: what happens if you lose vast amounts of other people’s money? Answer: you get a big gift from the federal government — but the president says some very harsh things about you before forking over the cash [...]

Just to be clear, I’m not talking about the Obama administration’s plan to support jobs and output with a large, temporary rise in federal spending, which is very much the right thing to do. I’m talking, instead, about the administration’s plans for a banking system rescue — plans that are shaping up as a classic exercise in “lemon socialism”: taxpayers bear the cost if things go wrong, but stockholders and executives get the benefits if things go right.

The banks need more capital, and nobody's willing to offer it but the government. Under normal circumstances, you would imagine that the entity offering several times more than the total market value of the bank would in exchange get... ownership of the bank. But that's not how we do things here in the good ol' U.S. of A.

If news reports are right, the bank rescue plan will contain two main elements: government purchases of some troubled bank assets and guarantees against losses on other assets. The guarantees would represent a big gift to bank stockholders; the purchases might not, if the price was fair — but prices would, The Financial Times reports, probably be based on “valuation models” rather than market prices, suggesting that the government would be making a big gift here, too.

And in return for what is likely to be a huge subsidy to stockholders, taxpayers will get, well, nothing [...]

There’s more at stake here than fairness, although that matters too. Saving the economy is going to be very expensive: that $800 billion stimulus plan is probably just a down payment, and rescuing the financial system, even if it’s done right, is going to cost hundreds of billions more. We can’t afford to squander money giving huge windfalls to banks and their executives, merely to preserve the illusion of private ownership.

This really hinges on the valuation of those troubled assets. Because the banks are insolvent, any rescue for them doesn't work unless the government massively overpays for the assets. You could change that, once the assets are sold, newly solvent banks must make up the difference at some time in the future between what the government paid and what they received, but there doesn't seem to be much enthusiasm in that, either. Alternatively, the government could put people to work fixing up the properties involved in the toxic securities, for resale at a certain point, which isn't that different from the Home Owners Loan Corp., but it's impossible to know what mortgages are part of what securities, global assets would almost certainly have to be bought, and there would still be a massive shortfall to the taxpayer while the execs get off scot-free.

There has to be a price to shareholders and executives for being made whole at the expense of the taxpayer. Right now, it appears that the financial interests don't think there should be ANY price. I personally think the price should be ownership of the firms, with shareholders wiped out (It occurs to me that would spell the downfall of every public pension program in the country, but the bailout money could go right to the Pension Benefit Guaranty Corp. to manage that). Perhaps the expected regulatory changes is the middle ground here. But it would be a small price for what amounts to trillions of dollars from every taxpayer in the country.

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