With the “insurance” option, banks would pay the government to insure crap debt and then sell it to private market buyers instead of the government. Banks won’t use this option because the insurance payments will bankrupt them, and the government shouldn’t use it because taxpayers will be on the hook but won’t have any chance at upside. But now that McCain and Republicans can crow to constituents about how they held the line, they’re said to be happy.
We’re not happy. We still can’t understand why Paulson went this route instead of recapitalizing the banks with equity (See “Two Better Bailouts” and “Warren Buffett Reveals Bailout’s Dirty Little Secret“). But that’s never been on the table. The current version allegedly has an equity component to it, so hopefully taxpayers won’t get completely hosed.
Now the question is whether the deal will actually work.
PS: Will taxpayers really get hosed? That depends on two things:
- The price the government pays for the trash assets it buys. Buffett and other smart investors say the government should pay the market price. Alas, Bernanke intends to pay a theoretical “hold to maturity” price that is far above the market price. This is not encouraging.
- How much equity the government gets in exchange for taking the crap loans off the banks’ books. If the answer is “a lot,” and the bank goes on to thrive, taxpayers could end up doing just fine.
The trouble with both of these factors is that the banks aren’t stupid. Treasury is launching this plan to rescue the economy. That means the banks will try to hold out for a good deal.
See Also: Congress Fiddles While US Burns
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