Tuesday, October 14, 2008

What the repackaged bailout really means...

Yesterday, Mr. Paulson in his infinite wisdom decided that we are going to scrap the original plan to buy distressed, toxic assets from banks and instead decided to invest about 250 billion directly into some select banks and financial institutions. The plan is to take an equity stake in the banks thus guaranteeing the taxpayer that we will see some kind of a return on the investment. In case none of these banks fail, the taxpayer will see a return on the investment. What was conspicuously absent in the plan was any form of regulatory framework, compensation ceilings or change in management teams.

If I were to explain in laymans terms what this kabuki play of a handout from the Treasury's perspective, this is what it might look like:

"Banks, here is an investment of taxpayer money that Secretary Paulson would like to make in your company. You were singled out just because of the fact that I know some of the CEO’s personally, you are a 'leading financial institution' and if I may use euphemistic phrases, ‘you are too big to fail’. You may take this money and do what you like. If you profit from our investment, the taxpayer gets a part of the profits. If you go under, I will just count this as a bad investment gone awry. Either way, you are free to do exactly what you did for the last 10 years leading up to the bubble and you are free to carry on doing the same thing - we really do not care. What this really means to the bottom line is that way you will be able to continue your high risk bets in overleveraged financial instruments that has become your de-facto business model, your stupendous compensation packages that the CEO's and the board have gotten used to and you get to keep your current management board that got us into this mess. Go ahead, let the good times roll!!"

This looks increasingly like a very wealthy investor indulging in high stakes investments in large blue chip companies.

OK, all this sounds very, very interesting, but what about that homeowner who is being foreclosed?

Oh, that individual. Hmm… Well, they need to fend for themselves. Hey, this is the free market.

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