by Eric Martin
Barry Ritholtz on a recent piece by Joseph Stiglitz:
Over the past few months, I have criticized CEA director Lawrence Summers “Sacred Cows/Save the Banks” approach, rather than a save the financial system approach. And the mad attempts to bailout the bond holders also came in for some harsh words. Joseph Stiglitz agrees:
The Obama administration’s bank- rescue efforts will probably fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said.
“All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview yesterday. The people who designed the plans are “either in the pocket of the banks or they’re incompetent.”
The Troubled Asset Relief Program, or TARP, isn’t large enough to recapitalize the banking system, and the administration hasn’t been direct in addressing that shortfall, he said. Stiglitz said there are conflicts of interest at the White House because some of Obama’s advisers have close ties to Wall Street.
“We don’t have enough money, they don’t want to go back to Congress, and they don’t want to do it in an open way and they don’t want to get control” of the banks, a set of constraints that will guarantee failure, Stiglitz said.
The return to taxpayers from the TARP is as low as 25 cents on the dollar, he said. “The bank restructuring has been an absolute mess.”
Rather than continually buying small stakes in banks, weaker banks should be put through a receivership where the shareholders of the banks are wiped out and the bondholders become the shareholders, using taxpayer money to keep the institutions functioning, he said.”
No matter how you slice it, the Obama approach pushes the onus (and massive bill) on taxpayers, and away from shareholders and bondholders. The common retort is that shareholders have been effectively wiped out already, so what's the point. Only, so long as shareholders aree still holding their shares, their "wiped out" position will wipe back in once the stock price rebounds after we funnel hundreds of billions in taxpayer money in to recapitalize the banks. On the other hand, if we took the banks into receivership, the taxpayers (not the supposedly "wiped out" shareholders) would capture the increase in value of the recapitalized banks when they are eventually resold to the public.
Besides, the bondholders haven't taken their haircut yet. And they should - at least, ahead of taxpayers who elected to bear none of the risk.
Further, with the same management in place, the same enormous "too big to fail" structures intact, the same divorced-from-performance, ludicrously massive compensation packages, the same outsized influence in Washington, we will merely be teeing up the ball for the next bailout some time in the near future.
This will not end well.
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