Ken Nelson

 
Heads bank shareholders win. Heads taxpayers lose.

Jeff Sachs skewers the new Geithner bank plan in today’s Financial Times:

But under the Geithner-Summers plan the loan is precisely designed to be a one-way bet, for the purpose of overpricing the toxic asset in order to bail out the bank’s shareholders at hidden cost to the taxpayers.

He correctly points out that since they think they can’t go back to Congress to do what they said they would do with TARP I, that they instead crafted a deal with the Fed and FDIC to print money to do this without Congressional oversight and any significant taxpayer awareness.

The right way forward is to place loss squarely on who took the bet. In this case, shareholders of troubled banks. I see no need to spend my hard earned money bailing them out. They should lose their investment for choosing unwisely.   Perhaps, in return for putting my taxpayer capital at risk, I’ll accept bank equity in return, or a loan with some reasonable assurance of repayment or equity if defaulted. 

I understand the need to recapitalize banks but I don’t understand why the money has to flow throw to their shareholders.  The plan as it exists now is an end-run that sticks taxpayers with the bill share speculators should be stuck with.   It misuses money intended to bailout depositors, not shareholders, and guarantees large losses for the taxpayer.

Bad deal – and it should be no deal.