As Hank Paulson jams his emergency bailout through Congress, one question hasn’t been answered: Why isn’t he doing it the way Sweden did in 1992–forcing the banks to take writedowns and then taking equity in exchange for capital?
This bailout fixed the Swedish banking system, which was suffering from similar ailments. It did it quickly, avoiding a Japan-like scenario. By eliminating moral hazard, it prompted at least one big bank to get its own act together instead of turning to the government for help. And it ended up costing taxpayers very little.
Why did it cost taxpayers little? Because the government benefited from the equity upside when the banks got headed in the right direction again.
Instead, Hank wants to buy all the banks’ problems off their balance sheets–at prices the banks set–thus letting their shareholders off the hook and sacrificing any equity upside.
We understand why Congress is rushing to cram this into law, but we don’t understand why the equity question hasn’t been at least asked (let alone answered).
Why, Hank? Why?
(More details on Sweden bailout in Carter Dougherty’s NYT piece)
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