Legal Commentary

More On The Geithner Plan

By Big Tent Democrat

One senior lecturer at the University of Chicago is dissatisfied with the Geithner Plan:

Even if it is successful, the [Geithner Plan] will add very little new capital to the banks — roughly only the amount paid for toxic assets that is over and above their current value.

[More...]

There is a simpler, sounder and fairer way to recapitalize an insolvent bank. The government should seize it, as it is already authorized — indeed, compelled — to do. Then it could inject cash (in the form of Treasury notes) as equity in the bank and, at the same time, remove the toxic assets the bank holds. Bank regulators might perhaps swap Treasury securities for toxic assets “at par” — that is, in an amount equal to the original purchase price of the assets removed. This would be a fair transaction, and it would cost nothing, because the government would own both the bank and the bonds. The toxic assets could then be placed in the basement of the Treasury building while we wait to see what they turn out to be worth.

(Emphasis supplied.) Actually, that would not be a fair transaction as the government would be overpaying for the toxic assets. But at least this plan is honest about the problem. The Geithner Plan's fundamental problem is its disingenousness. This proposal, which I do not favor, has the benefit of being honest about what the problem is and what the proposal intends to do - cover the bank's debts with taxpayer money.

Let's hope a former senior lecturer from Chicago adopts a more honest approach than the Geithner Plan.

Speaking for me only

Full post as published by TalkLeft on April 06, 2009 (boomark / email).