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Time to Overhaul the Bailout Plan

Posted By Barry Ritholtz On January 10, 2009 @ 10:00 am In Bailouts,Credit,Really, really bad calls,Taxes and Policy | Comments Disabled

The Treasury Department TARP/Bailout plan has been an utter disaster. It has been mishandled from day one — poorly planned, poorly executed. Both Hank Paulson and Congress for passing such a shoddy piece of legislation should be ashamed of themselves for their horrific judgment and egregious failures.

It is hard to see a single thing that it has accomplished, other than giving away 100s of billions of dollars of taxpayer money. In return, the government has gotten . . . practically nothing.

No new lending, no new hiring, excess bonuses going to the creators of the mess, dividends going to the shareholders who bought these poorly managed companies. The current bailout will end up being the working definition of Moral Hazard for generations to come.

A smarter way to give away billions of dollars is to match private sector investments. Triage all the banks, put down the bad ones, and invest on the same terms as the private sector into the banks that can be saved. Warren Buffett put $5 billion into Goldman Sachs and got a good combination of warrants and yield. Why didn’t the taxpayer get the same terms?

If we had required private sector investment first (min investment, 100 million dollars), and then a 5X or even a 10X Uncle Sam match, we would have been much better off. Instead, firms like Citibank were rewarded for their reckless speculation and their gross incompetence.

Which is why this article in the Washington Post — Geithner Preparing Overhaul Of Bailout [1] — is at least somewhat encouraging.

Confronted with intense skepticism on Capitol Hill over the $700 billion financial rescue program, Treasury Secretary nominee Timothy F. Geithner and President-elect Barack Obama’s economic team are urgently overhauling the embattled initiative and broadening its scope well beyond Wall Street, sources familiar with the discussions said.

Geithner has been working night and day on the eighth floor of the transition team office in downtown Washington with Lawrence H. Summers and other senior economic advisers to hash out a new approach that would expand the program’s aid to municipalities, small businesses, homeowners and other consumers. With lawmakers stewing over how Bush administration officials spent the first $350 billion, Geithner has little chance of winning congressional approval for the second half without retooling the program, the sources added.

That challenge is underscored by a report from a congressional oversight panel scheduled to be released today that hammers the outgoing Treasury Department for its handling of the financial rescue, including “what appear to be significant gaps in Treasury’s monitoring of the use of taxpayer money.” The report, moreover, faults the Treasury for failing to properly measure the success of the program or establish an overall strategy and skewers the department for not using any of the funds on foreclosure relief as Congress had directed.

Much of the work by Obama’s team has focused on establishing principles that would clearly define the program’s course and the conditions of government aid to financial firms.

I suspect there is a bit of revisionism in this narrative, giving Geithner some distance from the disastrous TARP plan. At the very least, the mere fact someone is thinking strategically, rather than reacting emotionally is a small step int he right direction.

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Source:
Geithner Preparing Overhaul Of Bailout [1]
Obama Team Broadens Scope to Secure Final $350 Billion for Rescue
David Cho
Washington Post, January 9, 2009; Page A01

http://www.washingtonpost.com/wp-dyn/content/article/2009/01/08/AR2009010804109.html


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[1] Geithner Preparing Overhaul Of Bailout: http://www.washingtonpost.com/wp-dyn/content/article/2009/01/08/AR2009010804109.html

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