On Friday evening, Treasury Secretary Paulson made the most stunning disclosure to date on the Treasury's plan to bail out the banking system. A video of that disclosure is available from the BBC. The statements are between the 3:30 and 4:10 minute marks on the video.
Treasury, according to the video, is twisting the bail out legislation into an ability to acquire from "troubled" financial institutions, non-voting preferred or common stock. I cannot believe that any legislator that voted for the bail out bill ever intended for the legislation to be viewed as a means of granting unsecured loans. At least there was the facade that securities were being acquired at "market" and would be disposed of in a timely fashion, hopefully at a profit. Now, with this latest interpretation, all appearance of fiscal responsibility will be eliminated.
I have argued before that the only solution to the financial mess created was to authorize the Treasury to purchase preferred stock in the financial institutions. However, that stock was always to be cumulative and voting. Any other type of "investment" is guaranteed to fail because there is no mechanism requiring the accountability of management.
What a difference between acquiring distressed securities at market value, which was the was the bail out bill was promoted, and making an unsecured loan to a "troubled" institution plus keeping management in place. The same management that caused the problem in the first place!
It is time to stop doing "business as usual". It is time to start cleaning up the mess. Take a voting equity position in the banks, at least the taxpayer will have a say in replacing management, controlling the direction of the business in the future and participate in the rewards of a successful enterprise, if that should happen.
The acquisition of non-voting equity in lieu of acquiring securities is just a means of guaranteeing the taxpayer will end up the biggest loser in the game.
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