Geithner's Latest Plan: Better, But Still A Bailout

The Treasury has leaked a snapshot of its latest plan to save the banking system.  It has some positive attributes, but it’s still a bailout of banks and private investment managers at taxpayer expense.  (And those private investment managers, you can be nearly certain, won’t be managing YOUR money).

Deborah Salomon and Jon Hilsenrath, WSJ: No decision has been made on the final structure of what the administration is calling a private-public financing partnership, but one leading idea is to establish separate funds to be run by private investment managers. The managers would have to put up a certain amount of capital. Additional financing would come from the government, which would share in any profit or loss.

These private investment managers would run the funds, deciding which assets to buy and what prices to pay. The government would contribute money from the $700 billion bailout, with additional financing likely coming from the Federal Reserve and by selling government-backed debt. Other investors, such as pension funds, could also participate. To encourage participation, the government would try to minimize risk for private investors, possibly by offering non-recourse loans.

So let’s break that down. 

  • The trash-asset removal funds would be managed by private professionals (Good–the government doesn’t know how to do that)
  • The private professionals would have to put skin in the game (Good.  How much?)
  • The government would provide super-cheap financing.  (Gift. This will allow the investors to pay more than the assets would be worth in the real market.  This would thus be yet another version of recapitalize-banks-by-intentionally-overpaying-for-their-crap-assets).
  • The government would share in any profit or loss.  (Need more details. As long as private managers can lose a significant chunk of their own capital, the incentives are fair.  If the government protects the private investors, they’ll vastly overpay for the trash assets).
  • The government would “minimize risk.”  (Uh oh.  Sounds like downside protection.  That means a bonanza for the banks, because managers will overpay for crap assets, as well as the investors, who can just safely swing for the fences.)

Bottom line, this would probably get some trash assets off bank books, but largely at the expense of the taxpayer.  It would still be fairer to restructure the banks and force their stakeholders, not the public, to take the losses.

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