Thursday, September 25, 2008

A Solution to the Financial Mess?

Business Week's Peter Coy has an intriguing suggestion for resolving the financial crisis: a more focused approach that would help the strongest banks and let the weakest ones wither.

Read about it here.

Peter writes:
The risk. . . of a free-market bailout is that the money will be spent inefficiently. The companies that get the biggest benefits will be the ones that accumulated the biggest globs of unwanted securities. As a result, the government could be propping up zombie firms that wouldn't survive under ordinary circumstances. These companies are unlikely to have enough funds to lend effectively. Instead, they will focus all their energy on simply surviving, while sucking up funds that would be better used elsewhere.


He suggests that it may be better "for the government to focus less on buying bad assets and instead recapitalize the financial system by buying substantial stakes in selected companies. That amounts to picking winners and losers, a hated concept in free-market circles. But it would save money and give taxpayers some of the gains when banks eventually recover."

(Hat tip: Peter Cohan.)

UPDATE: Dow Jones's Michael Rapaport has another worthy idea:

First, the government should buy only a limited amount of bad assets - say 20% of each bank's holdings - at their full current carrying value. (Paulson's $700 billion plan might not buy all the bad assets anyway; banks now hold more than $1.3 trillion of mortgage-backed securities alone.) That would enable banks to unload some of their worst assets, inject a big chunk of capital into them, and start thawing the market freeze that has left banks reluctant to lend to each
other.


Then, whatever amount the government saves by not buying more bad assets would be used to help homeowners facing foreclosure and commercial borrowers facing similar trouble, and to beef up federal deposit protection. . .
As of AM Friday, however, it seems that no idea (good, bad or indifferent) stands any chance of going anywhere. And none will give relief to homeowners, such as by amending the abysmally pro-business bankruptcy laws.

© 2008 Gary Weiss. All rights reserved.

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