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Choosing *who* to bail out
One thing that I don't see described in Paulson's proposal, or even Dodd's far better plan, is any mention of how to choose the specific companies or other entities that should be bailed out.
I'd feel pretty unhappy if the Treasury was bailing out random investor groups that happened to lose money on what amounts to a bet -- I've lost money on stock picks and don't expect to go to the Treasury to get my money back.
When you start looking at companies providing real benefits to the economy, it gets harder to decide who to bail out. If, for example, Citibank and Mellon are both in trouble, and one requires three times as big a bail out to stay solvent, the Treasury might choose to bail out only the one requiring the smaller bail out. And if there are already "enough" surviving commercial banks, you might choose to let them both fold, or merge together.
I'm not sure how you make these calls, but I think that at the very least, they have to be done openly, with a clear rationale provided by the Treasury as to which companies' securities will be purchased, and why. And if a bank or other financial institution wants to sell its bad securities to the Treasury, it should have to disclose all of the details of its financial state to the Treasury and the public, so the Treasury can tell whether it is a good investment or not, and citizens can tell whether a consistent investment policy is being followed. Government investments of this magnitude are rife with opportunities for corruption and self-dealing, and it would be foolish to allow these choices to be made in the dark.
In other words, in the very hard area of choosing which companies to bail out, transparency is key. The bail out law should require the Treasury to provide both periodic declarations to Congress and the public of its high level goals, such as keeping at least 5 large commercial banks operating, along with the accounting details of the investments made to achieve those goals.
And if these requirements scare off some of the less desperate companies from coming to the Tresasury at all, so much the better.
I'd feel pretty unhappy if the Treasury was bailing out random investor groups that happened to lose money on what amounts to a bet -- I've lost money on stock picks and don't expect to go to the Treasury to get my money back.
When you start looking at companies providing real benefits to the economy, it gets harder to decide who to bail out. If, for example, Citibank and Mellon are both in trouble, and one requires three times as big a bail out to stay solvent, the Treasury might choose to bail out only the one requiring the smaller bail out. And if there are already "enough" surviving commercial banks, you might choose to let them both fold, or merge together.
I'm not sure how you make these calls, but I think that at the very least, they have to be done openly, with a clear rationale provided by the Treasury as to which companies' securities will be purchased, and why. And if a bank or other financial institution wants to sell its bad securities to the Treasury, it should have to disclose all of the details of its financial state to the Treasury and the public, so the Treasury can tell whether it is a good investment or not, and citizens can tell whether a consistent investment policy is being followed. Government investments of this magnitude are rife with opportunities for corruption and self-dealing, and it would be foolish to allow these choices to be made in the dark.
In other words, in the very hard area of choosing which companies to bail out, transparency is key. The bail out law should require the Treasury to provide both periodic declarations to Congress and the public of its high level goals, such as keeping at least 5 large commercial banks operating, along with the accounting details of the investments made to achieve those goals.
And if these requirements scare off some of the less desperate companies from coming to the Tresasury at all, so much the better.
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