A Simpler Machine

In a classically straight-forward, clear, and precise essay, investment advisor and University of Chicago lecturer Andrew Rosenfeld makes the case against Tim Geithner's "Public-Private Partnership" folly ["How To C lean a Dirty Bank"]. It should work just as efficiently as the FDIC bank closures:

• Seize the bank
  
• Fire the management, stock holders, and creditors who let it gamble away the business
• Re-capitalize the new bank with U.S. bonds, and
  
• Sell it back to the public within a month.

As Rosenfeld points out (following economist Joseph Stiglitz' similar observations) --

If markets work at all (and if they don’t, Treasury’s new plan is doomed to fail), such an auction would produce a new privately owned “clean” bank, with ample capital to lend. It would also generate proceeds from the sale that would be at least as great as the value of the securities injected into the bank as equity — and likely greater.

If the recapitalized bank could not be sold at a price that amounts to (at least) the new cash injected, then the bank would be worthless, but not because of the toxic asset problem. It would be because the bank has been mismanaged or has other bad loans unrelated to the mortgage crisis, and such a bank should be allowed to fail.

If the sale succeeds, however, the government would have created a fully financed private bank at essentially no incremental cost to taxpayers, and Treasury would still hold the toxic assets on its books — to be sold whenever it becomes economical to do so.

Instead, Geithner continues tinkering in the basement with some sort of Rube Goldberg machine for no better reason than to protect "from their own folly" bad bankers and those who placed bets on them.

We need the simpler machine; the one that works faster, costs less, and does the job better.