Prime plus 5 and secured 200% by American held assets. OK!
Prime plus 5 and secured 200% by American held assets. OK!
A voice of reason. While the idea of taxpayer money going to 'foreign' banks correctly grates on our sense of fairness, there is not enough sensible reporting of the details of this rescue plan.
First, the problem that many of these financial institutions face is not more liabilities than assets, but short term liquidity. Even Lehman Brothers, in their bankruptcy filing, listed more assets than liabilities. This didn't do them any good, because in the current climate of uncertainty, no one was willing to extend them credit to conduct ordinary business, since the exact valuation of their assets was unknown. The intent of these federal bailouts is to calm the sense of panic in the markets so institutions will extend each other the credit they need in order to do daily business, just as they've been doing for decades.
Next, we are not spending $700B dollars that will never be seen again. Most of the money is buying mortgage assets that have considerable real value. Banks may have been stupid to lend $500,000 on a risky mortgage for an overvalued house, but those houses are probably still worth $400,000. The federal government is planning to buy up some of those mortgages at a discount, and sell them off gradually over the next few years. The Resolution Trust Corporation, which followed a similar strategy to fix the Savings & Loan crisis in the late 1980s, ended up making a small profit for the federal government.
Also, the government is not handing out money on particularly favorable terms to these distressed financial institutions. The loans to AIG are at 11%, which is akin to you or I financing our house through credit cards. They have strong incentive to find better deals on the market, but the fact that they have a lender of last resort means they can keep operating even in the face of short term panic. Similarly, the government may buy up some bad mortgages, but it will buy them at a substantial discount, and will eventually sell them for close to full value or a small profit. The key to the financial markets is that they have ability to sell these mortgages today, rather than 2 or 3 years from now.
Finally, the issue of what are 'foreign' banks versus what are 'domestic' banks is so convoluted that it would be difficult to draw a clear line. Is a bank that is 51% US owned but does 75% of its business overseas more 'American' than a bank that's 49% US-owned, but does 75% of its business here? Lehman Brothers Investment bank was a US institution a week ago, but much of it is being bought by Barclay's (a Brittish bank). Are they US or 'foreign'? Do we tell foreign banks that lent money to US customers that they are now operating under a different set of rules than institutions that can claim U.S. ownership? If so, who will invest money in the US in the future?
I'm as frustrated as anyone by the irresponsibility of our government in encouraging these risky mortgages over the past decade. The federal government is now taking on a great deal of risky debt that it shouldn't have had to. But very little of that $700B will actually be 'lost'. If we let the market solve the problem at this point, we wouldn't much like what happened over the next 4 or 5 years. We're pretty much stuck with this bailout now. We ought put our anger and efforts in preventing this from happening again.