“Mr. Paulson must have had some reason for doing what he did. No doubt he still believes that without all this frantic activity weâ€™d be far worse off than we are now. All we know for sure, however, is that the Treasuryâ€™s heroic deal-making has had little effect on what it claims is the problem at hand: the collapse of confidence in the companies atop our financial system.
“Weeks after receiving its first $25 billion taxpayer investment, Citigroup returned to the Treasury to confess that â€” lo! â€” the markets still didnâ€™t trust Citigroup to survive. In response, on Nov. 24, the Treasury handed Citigroup another $20 billion from the Troubled Assets Relief Program, and then simply guaranteed $306 billion of Citigroupâ€™s assets. The Treasury didnâ€™t ask for its fair share of the action, or management changes, or for that matter anything much at all beyond a teaspoon of warrants and a sliver of preferred stock. The $306 billion guarantee was an undisguised gift. The Treasury didnâ€™t even bother to explain what the crisis was, just that the action was taken in response to Citigroupâ€™s ‘declining stock price.’
Three hundred billion dollars is still a lot of money. Itâ€™s almost 2 percent of gross domestic product, and about what we spend annually on the departments of Agriculture, Education, Energy, Homeland Security, Housing and Urban Development and Transportation combined. Had Mr. Paulson executed his initial plan, and bought Citigroupâ€™s pile of troubled assets at market prices, there would have been a limit to our exposure, as the money would have counted against the $700 billion Mr. Paulson had been given to dispense. Instead, he in effect granted himself the power to dispense unlimited sums of money without Congressional oversight. Now we donâ€™t even know the nature of the assets that the Treasury is standing behind. Under TARP, these would have been disclosed.
“There are other things the Treasury might do when a major financial firm assumed to be ‘too big to fail’ comes knocking, asking for free money. Hereâ€™s one: Let it fail.
“Not as chaotically as Lehman Brothers was allowed to fail. If a failing firm is deemed ‘too big’ for that honor, then it should be explicitly nationalized, both to limit its effect on other firms and to protect the guts of the system. Its shareholders should be wiped out, and its management replaced. Its valuable parts should be sold off as functioning businesses to the highest bidders â€” perhaps to some bank that was not swept up in the credit bubble. The rest should be liquidated, in calm markets. Do this and, for everyone except the firms that invented the mess, the pain will likely subside.”
How to Repair a Broken Financial World, by Michael Lewis and David Einhorn, January 3, 2009 (this article actually starts at The End of the Financial World as We Know It. It’s all a time-worthy read.)
Yes! Nationalize it all! Then the taxpayers (like me!) would own it and we’re a Socialist/Capitalist Utopia! God, I never thought I’d live to see the day…oh, wait…I haven’t because the wingunts would go crazy if anyone other than bushco or zombieSt.Reagan tried to do anything remotely like that. Oh well. It was a nice thought while it lasted.
(So since it’s not going to happen, I might as well add that liquidating in calm markets might be trickier than it sounds. In The Greatest-Ever Bank Robbery: The Collapse of the Savings and Loan Industry, by Martin Mayer, he spends much of the last chapters describing the near impossibility of buying defunct S&L assets, mainly property, from the government. No one even knew which departments were in charge of selling it to buyers, with CASH, who called to inquire. Crazy, very crazy. I’m not sure it’s any better even now.)
By the way, I think Paulson panicked and started throwing money at whatever scared him most. I really do wonder what the hell he’s so afraid of. Maybe I should be afraid of it, too.