Monday, March 23, 2009

"Helicopter Tim's" Bank Rescue Plan

What follows is the usual moderately long post. But after re-reading it, we realize it probably could have been reduced to a single sentence: Treasury Secretary Tim Geither's plan looks very much like it is designed to rescue Wall Street, not Main Street.
Today, U.S. Treasury Secretary Tim Geithner announced the details of his plan to rescue bad banks who took absurd risks in the ever-escalating struggle for higher and higher executive bonuses. It is, as Paul Krugman predicted, essentially the same plan hatched by Bush's Treasury Secretary, Hank Paulson, although Paulson later rejected it because he concluded it would not work.

If you want to see a summary, Geithner has issued a White Paper to explain the "Public-Private Investment Program." What Geithner calls the "Legacy Loan Program" -- and the rest of know as "Bank Bailout Time" -- essentially lets Wall Street put up a very small percentage of the loot while the government remains on the hook for virtually all losses.

In other words, Geithner plans to practically fly over Wall Street and drop billions of dollars from helicopters. And, he promises lots and lots more if that isn't enough to cover Wall Street's losses.

The "primary areas of focus for the government’s troubled legacy asset programs" are, the White Paper says, "the residential and commercial mortgage...portfolios." Secretary Geithner essentially is proposing to drop money from helicopters into the laps of hedge funds to solve it.

That may marginally improve some bank balance sheets, and it certainly is a great bet for the gamblers on Wall Street. But it offers nothing to the man on Main Street or small businesses.

If Geithner and Larry Summers feel compelled to paper over the problem with money from the heavens, why not drop it, instead, over Main Street so real people can pay down their mortgages or put food on the table?

Yes, that would probably support some undeserving poor folk who knowingly took out loans they couldn't afford, although by all accounts they are an infinitesimal part of the problem. But isn't even that preferable to supporting all those Wall Street gamblers who can't pay off their own gambling credit default swap debts, particularly when however rich they get largely will never trickle down to the rest of America?

3-23 pm

Don't take our word for it. Take the word of the stock specialist at Bank America, formerly of Merrill Lynch (R.I.P.):
Investors should sell bank stocks after they rallied 12 percent today because the Treasury Department’s plan to buy toxic assets won’t stop profits from dropping, Bank of America Corp.’s Richard Bernstein said.

Removing devalued loans and securities from banks’ balance sheets is a short-term solution that will delay the problem’s ultimate solution, which is bank takeovers, Bernstein said. The government won’t be able to inflate the prices banks receive for selling bad assets indefinitely, he added.

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