Hank Paulson's plan to spend $700 billion of your money to buy some share of the $13 trillion worth of toxic waste -- in the form of mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) makes little sense. It involves a reverse auction in which the Financial Institutions (FIs) that hold this junk bid to see who can sell it to the Treasury for the lowest price. The FI's have no incentive to participate in this scheme because to do so would lead to big write-downs and leave a capital hole in their balance sheet that they can't fill.
The basic problem here is that banks lack capital. The simple solution, which occurred to me this morning after reading an op-ed piece by Paul Krugman, is for the government to buy the banks and help them raise the capital they need so they can resume lending. There is so much political damage from the current catastrophe that nationalizing the banks as I propose really won't hurt that much more. I am not sure how much it will cost -- but we've already nationalized Fannie, Freddie and AIG so why not make a list of all the under-capitalized commercial and investment banks and let the government take them over.
Compared to the $700 billion that Paulson wants for his wacky plan, we could buy up Citigroup (NYSE: C), Morgan Stanley (NYSE: MS), and Goldman Sachs (NYSE: GS) for about $200 billion (roughly 10% over their current market value). In light of the $800 billion spent so far, that $200 billion would be chump change. And if the government runs them right, it can sell their shares back to private investors once we get through this period of "adjustment" and make a nice profit for taxpayers.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citi shares and has no financial interest in the other securities mentioned.










Reader Comments (Page 1 of 1)
9-22-2008 @ 4:16PM
william lindblad said...
hairbrained scheme. Keep trying though - there be one that makes sense out there.
13 trillion is a tad high. Maybe 6-7 - worldwide.
9-22-2008 @ 4:20PM
NoInform8tion said...
Well why don't we wait a few weeks and we could buy the banks for half their book value or less? If we want them. Only buy them if they can cause the government and tax payers to profit largely. Otherwise, just let them go and let survival of the fittest prevail, if there are any left, they are the good ones. If none are left start all over from scratch. I'd rather risk a great depression than deal with rewarding these banks and companies that cared so little for US citizens.
9-22-2008 @ 5:56PM
Heyhooves said...
Have the communist taken over when I wasn't looking? This is a ridiculous suggestion to nationalize the banks.
9-22-2008 @ 6:07PM
RichR11511 said...
Don't nationalize the banks, nationalize the oil companies. At least then we can make a profit.
9-22-2008 @ 9:52PM
Mike Sanders said...
Perhaps, the author meant that we need to "capitalize the national banks," rather than the other way around... Nationalizing the banks, doesn't seem to make sense, so it must be a typo, or a "senior moment" type of thing... I dunno.
9-22-2008 @ 10:15PM
MiMi said...
Is this another RTC? The files on those were a mess.....and the government spend many $ trying to get those straighten out......did the government not learn anything from that mess? I personally think the left hand does not know what the right hand does....I am fighting a worker comp claim and I am not able to work and have been denied my SSD....so I think this is bad.....I earned my benefits and can not get them....THE SYSTEM IS BROKEN....REALLY BROKEN....and NOBODY CARES!
9-22-2008 @ 10:16PM
NoInform8tion said...
Who even cares if the banks can or can't loan money, because there is no one left who can afford to borrow. LOL Problem solved.
9-23-2008 @ 6:58AM
William said...
How can these Democrats have used these so called sham agencies as their personal slush funds while we are in a war? They are not investigating these agencies like they did the oil companies because they are the culprits.
9-23-2008 @ 9:17AM
john said...
Bloated, fat, selfish politicians. I hope they all choke on the high hog they all enjoy; while regular people suffer. Name one politician who is lossing money on this? The bail out is going to cost me and my family money that we don't have; because we are spending it on gas and food!!!!!! All politicians can rot and die. They have done nothing for me, personally, except cause worry, concern and spend OUR MONEY!!!!! If the 700 billion dollar package goes through, not a one will recieve my vote ever again. Some say if the gov't doesn't bail all these fat bloated institutes our economy will tank and the dollar will drop. If that were to happen it could increase our foreign investment and increase tourism. It would also stop foreign export of AMERICAN jobs!!!! ALL IN ALL FREE MARKET CAPITALIST ECONOMY IS NOT FREE, NOR IS IT TRUELY CAPITALIST.
9-23-2008 @ 11:35AM
d.moore said...
I truly believe that somewhere along the way the "American Public"has forgotten what it was like to starve and not be able to keep the home and food that we work so hard for.Vote out Fat Pocketed,lobbey takers who are stealing the food from our childrens mouths.If someone broke into your house and stole your life you would call the police after you shot them.Someone should payup to the Workingclass so they do not lose it all.
Take Back America!!!!!!!!!!!!!
9-23-2008 @ 1:52PM
paladin902 said...
So let me get this straight, the Republicans have been in control of the White House, Senate and Congress from 2001-2007 (and conservatives are notorious for Deregulation), and now you want me to vote for more of the same people that have caused "the biggest financial crisis since the great depression", you caused this and this will hopefully be the end of "Conservatives and Republicans" as we now them now. The whole Republican mindset is nothing like what Barry Goldwater put forth. The Republican party is dead. We need another party.
9-23-2008 @ 9:46PM
annette said...
EY OPENING IDEA.
Maybe someone is listening.
HUD needs to come up with a foreclose bailout program. An special FHA program, where homeowners qualify to refinance their loans. Must have jobs and be able to afford their homes. This is the only way foreclosures will slow down and even stop. This will stop property values from continuing to decline. People can stay in their homes at a "current market value", whatever it may be. Many lenders could start doing more "good" qualifying loans. If they don't do something, then the end hasn't even come close.This spiral we are on hasn't hit the bottom. How low will it all go. Properties will continue to drop, more foreclosures, lower values in homes, unemployment will go up even further. Sounds like another great depression. Let cheer up history can't repeat its self, right?
10-29-2008 @ 7:17PM
John Marinucci said...
While the government is bailing ou banks,why is no one addressing the BAIL-OUT of the Pension Benefit Guarentee Corporation,since Director Steve Kadarian swerpt the Country and terminated hundreds of Pensions funds,Paying All those benefits now instead of age 62 or 65 based on your plan,The PBGC to my understanding is about $20 Billion underfunded. If the Government would Pay these monthly benefits now,it would stimulate the econamy far greater then the $600 stimulas check we received this year,Darn GOOD INVESTMENT and A MAJOR BOOST to the econamy. These are benefits we earned and SOOOO deserve.Come on Legislators how about rolling up your sleeves and go to work instead of passing the buck till after the election. We will remember you and we will not giv up this fight for benefits we earned and deserve.