Generous Henry's Big Bailout

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Dean Baker
TPMCafé (Talking Points Memo)

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Okay, we all should be glad that Treasury Secretary Henry Paulson seems to have abandoned, or at least sidelined, his TARP program and instead decided to directly inject capital into the banking system. The problem is under-capitalized banks and that is best solved by giving the banks more capital.

But, there is a big issue about the terms under which they were given capital. Secretary Paulson decided that a 5 percent rate of return on preferred share was good enough for the taxpayers. Warren Buffet got a 10 percent return for his investment.

No one would confuse Henry Paulson for Warren Buffet, but come on -- he could get a 4.0 percent return buying treasury bonds. I can't believe that he had such bad business sense when he was CEO of Goldman Sachs.

The markets gave Paulson's investment strategy a big thumbs down from the taxpayer perspective. Goldman Sachs shares jumped 10.7 percent after the details were made public. Shares of Bank of America rose 16.4 percent and Citigroup's stock rose 18.2 percent. Obviously the market thinks that Paulson gave the banks a really good deal.

It also seems unlikely that the executive compensation restrictions will have much effect. I doubt that we will hear about any top executives getting big pay cuts because of the bailout, but I will be very happy to be proven wrong.

In short, it seems that we have a whole new group of welfare dependents. Forget Reagan's mythical "welfare queen" who drove a Cadillac. These folks have private jets and homes on the Hamptons. And they wreck banks and economies for a living.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.