The Blog @ Spolitics

Bailout or Investment

It appears the key issue with the bailout plan is what price the government will pay for these garbage loans that are clogging up the financial system. If the government approaches this with the mindset that this isn’t free money they get to play with, then it’s possible the endeavor would turn a profit. That’s not a bailout as much as it’s the Uncle Sam engaging in a little opportunistic capitalism. Here’s how Warren Buffett put it:

You have all the major institutions in the world trying to deleverage. And we want them to deleverage, but they’re trying to deleverage at the same time. Well, if huge institutions are trying to deleverage, you need someone in the world that’s willing to leverage up. And there’s no one that can leverage up except the United States government. And what they’re talking about is leveraging up to the tune of 700 billion, to in effect, offset the deleveraging that’s going on through all the financial institutions. And I might add, if they do it right, and I think they will do it reasonably right, they won’t do it perfectly right, I think they’ll make a lot of money. Because if they don’t — they shouldn’t buy these debt instruments at what the institutions paid. They shouldn’t buy them at what they’re carrying, what the carrying value is, necessarily. They should buy them at the kind of prices that are available in the market. People who are buying these instruments in the market are expecting to make 15 to 20 percent on those instruments. If the government makes anything over its cost of borrowing, this deal will come out with a profit. And I would bet it will come out with a profit, actually.

So far, it looks like Paulson and Bernanke want to overpay rather than insisting that the banks take the hit they deserve. If done that way, it’s a bailout and it’s letting the companies off the hook for their greed and making the taxpayers take the hit.

The other big issue is who is going to be administering this plan and deciding — not only the price — but whose instruments to buy? It’s ripe for crony-ism and corruption.

If you happen to be in the Washington D.C. area right now, be sure to keep an eye out for the impending lobbyist stampede.