The Power of Ideas

Good Bank, Bad Bank, Naive Public

Well, here’s the newest plan…Good Bank, Bad Bank.  Take all of these bumbling institutions and split them into two pieces.  One piece will contain the residual part of the bank that ostensibly works; i.e. the assets that have value including the management teams (not that they are necessarily assets) and employees of the near failing institutions.  The non-performing assets will be unloaded into a separate institution (i.e., the US government and its taxpaying public). The general idea is that the restructured institution, well-capitalized and free of the noose of non-performing assets, will be able to begin lending again.  This may be true, although it is not clear how many of the retained assets will default.  Also, based on past experience, you have to wonder how many new loans will go sour too.

Well, maybe this new iteration of government financial innovation will work.  Although, past performance being a guidepost, I must admit I am skeptical. More importantly, I have a few more general concerns.  The first comes from the repeated promises made by our representatives in Congress that they are going to protect the American taxpayer.  Please stop insulting our intelligence.  That is exactly what this type of plan is unlikely to do.   The government will eat all of the losses which, unless years of experience has gone by the wayside, means that we the taxpayer will be footing the whole bill for the losses.  And let us not forget the Billions and Trillions that have alread been forked over with little recompense and nasty surprises like large bonuses and corporate jets.

Worse, most of the upside will be left for the Good Bank.  Let me translate this into English.  An awful lot of future profits will be paid to senior management of the Good Bank, ostensibly for the wonderful job they will be doing without all of those nasty problem loans that they originally put on the books.  I know we will receive promises to the contrary, but they will be as hollow as all the prior promises.  Does anyone really think the CEO’s and other senior management have gone or will go uncompensated.  I doubt it.  There are lots of ways to dupe a legislator or regulator.  Let’s try a simple one.  Most senior executives are loaded with option grants (I would not be surprised if many new options were granted at year end: yes that would really be a form of bonus).  In the aftermath of the separation, I think you can be pretty sure that management equity, including options, will be conveniently restructured in such a way to eliminate performance drag from the old institution.  Yep, in a few years time, these financial honchos could well be swimming in beautiful new swimming pools, tooling around in new Ferrari’s and, maybe, flying around in their own Gulfstreams all due to Congressional (oops, taxpayer) largesse.

I trust many of you are as angry and disappointed as I am about the course of events surrounding the financial bailout.  We may disagree on some of the issues, but very few of us (outside of the protected bankers) are happy to see a past and future generation of our hard work simply handed over to institutions that are responsible for their own demise.  Worse, we should not be happy that we have been conned into going along for the ride by the empty promises and assurances of our political establishment.  If the government has to bail out these institutions, make sure the taxpayer is really protected.  Leave future asset appreciation in our hands and make sure management does not reap windfalls.  I know we are also told taxation is a bad thing. But I see no reason why we should not really protect the taxpayer by making sure the financial institutions help pay for the mess they have left us.  Congress should institute a special financial institution tax that will continue until any and all losses are recovered; and it should be structured in a way that banks and bank management can’t make an end run around their responsibility.


January 28, 2009 - Posted by | Economics, Finance, General Interest, Politics

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