Bloomberg article: Paulson's Bail out...reasons..

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    Paulson's Reasons for Delaying Day of Reckoning: Jonathan Weil
    2008-10-02 13:37:41.970 GMT

    Commentary by Jonathan Weil
    Oct. 2 (Bloomberg) -- If you think this bailout is expensive, just wait until you see the next one.
    The $700 billion rescue plan approved by the U.S. Senate won't fix the core problem with the nation's ailing financial institutions. And it almost guarantees that you and I will have to pony up for an even costlier bailout someday, maybe soon, if the House of Representatives passes it tomorrow.
    Treasury Secretary Hank Paulson has correctly identified the
    quandary: Lots of shaky banks and insurance companies are showing strangely high values for assets that aren't worth squat in the market. Many need more capital and can't raise it. And he's right in saying the outlook is grim if we don't get this fixed.
    What's stunning is how little the taxpayers would get in return for their money under Paulson's package, and how illusory much of the banks' newly minted capital would be.
    Under the plan, Treasury would buy some companies' troubled assets at above-market values. To boost their capital, Paulson would have to pay the companies more than what their balance sheets say the assets are worth. Then other companies would use the rigged prices to write up, or avoid writing down, the values of similar holdings on their own books.
    So, the taxpayers get hosed on the asset purchases. Other banks use the trumped-up prices to cook their books. And investor confidence supposedly is restored.
    That brings us to this question: Why would a smart guy like Hank Paulson -- the former boss of Goldman Sachs -- advance such a dumb, shady plan? Let us count the reasons:

    No. 1: It delays our national reckoning until after the presidential election.
    Paulson first floated a bailout Sept. 18, at the very hour when shares of Goldman Sachs Group Inc. and Morgan Stanley looked like they might go into a death spiral. It's not so much a bailout, as it is a timeout. He had to follow up with something, anything, to stop the freefall from resuming. It didn't have to make sense.
    So it doesn't. The plan is about creating the illusion of stronger financial institutions, not strengthening them.
    The banks know this. Otherwise, they would have stopped charging each other near-record rates for three-month loans by now. The reason they haven't is because they're still afraid their customers -- other banks -- might go broke.

    No. 2: The reckoning will be worse than you can imagine.
    If Paulson were serious about recapitalizing rickety U.S.
    banks, he would infuse them with hundreds of billions of dollars of fresh government money, in exchange for ownership stakes. And if he wanted to create market liquidity for all those troubled assets on their books, he would be ordering banks to disclose everything there is to know about them, so Mr. Market could figure out their present value.
    He can't let that happen. Not now. If everyone could see how much the toxic waste is worth, the writedowns would be so huge that many banks would have to be declared insolvent.
    Better to let the next administration deal with the clean- up. The trouble is, the longer the government waits to address the banks' lack of capital, the worse it gets, barring a miracle.

    No. 3: He's helping his friends.
    Is there any doubt? Let's see.
    As of yesterday, Morgan Stanley Chief Executive John Mack owned 2.75 million shares of his company's stock, valued at about
    $67 million. If Mack can get Morgan Stanley to trade reams of sketchy paper for billions of dollars of our Treasury's cash, without diluting any of his stake in the company, who benefits?
    Paulson would have us believe it's you.

    No. 4: There's an excellent chance the Congress will pass it. Leave someone else to figure out the costs another day.

    (Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

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    --Editors: James Greiff, David Henry

    To contact the writer of this column:
    Jonathan Weil in New York at +1-212-617-5225 or

    To contact the editor responsible for this column:
    James Greiff at +1-212-617-5801 or