Guardian UK: Not so much bail-out as rip-off

[marmar]

Not so much bail-out as rip-off
The US Treasury's purchase of bad debt will benefit shareholders at the taxpayers' expense – and worse, won't work

Nouriel Roubini
guardian.co.uk, Monday September 29 2008 13:33 BST



Whenever there is a systemic banking crisis there is a need to recapitalise the banking/financial system to avoid a destructive credit contraction. But purchasing toxic/illiquid assets of the financial system is not the most effective and efficient way to do this.

Such government-led recapitalisation – via the use of public resources – can occur in a number of ways: by purchasing bad assets or loans; an injection of preferred shares; an injection of common shares; a purchase of subordinated debt; an issuance of bonds to be placed on the banks' balance sheet; an injection of cash; credit lines extended to the banks and government assumption of government liabilities.

A recent IMF study (pdf) of 42 systemic banking crises across the world shows how different crises were resolved.

In only 32 of the 42 cases was there any government financial intervention of any sort; in 10 cases systemic banking crises were resolved without any such action. Of the 32 cases where the government did recapitalise the banking system, only seven included a programme of purchase of bad assets/loans (like the one proposed by the US Treasury).

In 25 other cases there was no state purchase of such toxic assets. Even in cases where bad assets were purchased – as in Chile – dividends were suspended and all profits and recoveries had to be used to repurchase the bad assets. Of course, in most cases multiple forms of government recapitalisation of banks were used. ......(more)

The complete piece is at: http://www.guardian.co.uk/commentisfree/2008/sep/29/wallstreet.useconomy

[dkofos]

1. More sanity from the Guardian

[BrklynLiberal]

2. Now here's an idea that we will never see in our legislation...

Even in cases where bad assets were purchased – as in Chile – dividends were suspended and all profits and recoveries had to be used to repurchase the bad assets.

[Individualist]

3. Excellent article

Thanks for posting it.

[Mr_Jefferson_24]

4. K&R. Once again, the honest journalism has to be imported.

[redqueen]

7. As always, yes? Our M$M is as much of a corrupt, cruel joke as our leaders are.

:puke:

[Mr_Jefferson_24]

12. There are, fortunately, some bright exceptions in the alternative media...

...category, this from our own Autorank:

http://onlinejournal.com/artman/publish/article_3796.shtml

[redqueen]

14. Definitely.

And a few bright spots in the M$M as well.

Far too few, though... the exceptions which prove the rule.

[redqueen]

5. This is really starting to piss me off. So many examples... and

our leaders are floundering around like fish out of water, pretending not to know what to do.

Their main priority seems to be to protect the shareholders' profits. I doubt I have to tell you what I think of that particular goal.

[EFerrari]

6. In all honesty, I'm thoroughly confused now.

But, not trusting BushCo works for me. When have they ever done anything to help us. I can't think of a single instance.

[crispini]

8. Kick and R

for a very good article.

[Cleita]

9. Most notably, he said...

In the Scandinavian banking crises (Sweden, Norway, Finland) which are a model of how a banking crisis should be resolved, most of the recapitalisation occurred through various injections of public capital rather than a government purchase of bad assets.

Purchase of toxic assets – in most cases in which it was used – made the fiscal cost of the crisis much higher and expensive (as in Japan and Mexico).

Thus the claim by the Fed and Treasury that spending $700bn of public money is the best way to recapitalise banks has absolutely no factual basis or justification. It is a total rip-off that will mostly benefit – at a huge expense for the US taxpayer – the common and preferred shareholders and even the unsecured creditors of the banks.

Even the late addition of some conditions is a fig leaf of dubious value, as they are totally vague and fuzzy.

[redqueen]

13. Geez... we need to NOT do what Japan did.

:banghead:

There is NO reason to have any confidence at all... in the vast majority of financial "experts" who seem to have been studiously ignoring these lessons, or our lawmakers.

[New Dawn]

10. K&R

[Cleita]

11. ...

:kick:

[depakid]

15. This point is key:

The treasury plan also does not explicitly include an HOLC-style programme to reduce the debt burden of the distressed household sector. Without such a component, the debt overhang of the household sector will continue to depress consumption spending and will exacerbate the current economic recession.

My guess is that down the line this will be addressed over Republican objections.

However, something needs to be done now- whther it's this plan or some derivation of it- as the crisis is global, which was NOT the case in the specific examples he provides.

[JackBeck]

16. The bailout was a scam. More election year fear mongering by the Repugs.

[Roland99]

17. Roubini has been spot-on since at least Feb. No reason to stop listening to him now.

[crispini]

18. K&R

:kick:

[redqueen]

19. ...

:kick:

[redqueen]

20. ...

:kick:

[ContinentalOp]

21. k+r

[Laelth]

22. Thanks for posting this. n/t

:dem:

-Laelth

[riverdeep]

23. Kick,

for an overseas POV.

[progressoid]

24. Dead Link. - got a better one?

[redqueen]

25. Working link here... must-read stuff.

http://www.guardian.co.uk/commentisfree/2008/sep/29/wallstreet.useconomy

We have history to learn from, if anyone in DC cares to...

[progressoid]

26. Thanks, I'm printing this one out.

[magellan]

27. May cooler heads prevail. k&r

n/t