Bailout Preview: Idiot Banks Saved, Taxpayers Screwed*


UPDATE: Bank bailout postponed.

EARLIER: We had high hopes that the Obama administration would take a fresh approach to the bank bailout–namely, forcing banks and bank stakeholders to accept responsibility for their own decisions and ensuring that the bank saviors (taxpayers) got an appropriately good deal.  So much for our audacity.

As Paul Krugman explained last week, the Obama administration is “tying itself in knots” to avoid taking majority stakes in our insolvent banks, even though taxpayers desperately deserve them. Instead, they’re proposing the usual tortured half-measures, most of which involve dragging out the problem, preserving bank stakeholders, and giving taxpayers the short end of the stick.

A NYT editorial today makes one final attempt to show why temporarily taking a majority ownership position in banks wouldn’t be as bad as the Obama administration fears–and why it’s far better than the alternative. It, too, will no doubt fall on deaf ears:

NYT: Putting taxpayers first means that in exchange for shoring up the banks, the government must receive ownership stakes that reflect the level of support it gives. For the neediest banks, that would likely work out to a majority interest; de facto, taxpayers would own the bank.

In those cases, existing shareholders would be virtually wiped out and the government, as the owner, would assume responsibility for restructuring the bank. Contrary to stereotype, in countries that have successfully weathered serious bank crises, including the United States, such a takeover is preferable to leaving firms in the hands of those who have so badly mismanaged them.

Done properly, it fosters transparency and restores confidence by allowing for a prompt disclosure of expected losses and an attempt to assign realistic values to the assets that feed those losses. It does not mean putting a government careerist in charge or stacking the bank board with federal officials. Safeguards are needed to avoid political interference in lending and other banking decisions, and rules are needed to determine when and how the government should end its ownership.

Early word on the administration’s bailout plan is that it rejects taking control of deeply troubled, too-big-to-fail banks. But the alternatives may be even less appealing.

What are those alternatives? 

  • Buying crap assets for more than they are worth
  • Insuring crap assets to bail out banks and hide the cost to the taxpayer
  • “Ring-fencing” crap assets to delay the cost to the taxpaper
  • Getting taxpayers smaller ownership stakes than they deserve
  • Borrowing additional hundreds of billions to pay for everything

There’s a fair answer here.  Bummer that the Obama administration appears utterly unwilling to consider it.

See Also:
Can We PLEASE Just Fix The Banks The Right Way?
The New Refusal To Fix Banks Properly