Bank bailouts
I sent the letter below to The New York Times on January 16th. It never ran, but Paul Krugman has since written several articles along the lines of my letter. (Obama should have hired Krugman — and Joe Stiglitz — into his administration.)
The idea of letting failed banks fail is picking up steam, albeit not among the insiders empowered to decide how to spend taxpayer dollars. Reuters columnist James Saft today asks, “Why not just play by the existing rules and rescue the economy, rather than the banks and their foolish shareholders and counterparties? The choice for the Obama administration comes down to this: pay a subsidy to weak banks and reward failure and self-dealing or shut them down and start over again.” Amen!
And yesterday, Financial Times columnist Martin Wolf agreed: “Instead of decisive action to recapitalise banks, which must mean temporary public control of insolvent banks, the US may be returning to the immoral and ineffective policy of bailing out those who now hold the “toxic assets”.”
To the Editor:
Re “Rescue of Banks Hints at Nationalization,” Jan. 16:
Edmund Andrews writes that giving away taxpayer money to insolvent banks — by promising taxpayers will repay bank losses on junk assets — has “the virtue of protecting the bank’s common stockholders from being wiped out by the government.” Conversely, the approach favored by Britain and most economists and used in most successful bank rescues, “injecting capital in exchange for preferred shares with warrants to convert to common stock,” is apparently a vice because it “squeez[es] out the common shares.”
The ONLY reason failed bank shares have ANY value is because investors are betting government bailouts will socialize losses while allowing shareholders to pocket future profits. Stockholders SHOULD be wiped out when liabilities exceed assets. Instead, the Fed and Treasury are bailing out stockholders while burdening taxpayers with losses and risk.
This is no “virtue.” It’s a massive scam.
James Lavin
Posted by James on Wednesday, February 04, 2009