Thoughts on the bailout boondoggle

So what are my thoughts on this gazillion dollar attempted bailout of the financial system?

Well, if unfettered American capitalism wasn’t already on its deathbed due to the earlier bailout efforts, it’s lyingon a cold slab somewhere now. For better or for worse, the government is now intimately involved in everything from thepricing of mortgage backed securities (via Treasury’s plan to manipulate MBS yields by sopping up MBS in the openmarket) … to the insurance business (via its bailout of AIG) … to the pricing of certain financial stocks (via theridiculous move by the SEC to ban shortselling — but only for companies the government has deemed don’t deserve to godown).

Much about this bailout package is unknown at this point, too. Will it truly end up costing U.S. taxpayers $700billion? Or will they make out much better eventually if the government buys assets on the cheap, holds them for a longtime, and then sells them at a profit once the crisis has passed? Speaking of buying on the cheap, how exactly will thegovernment determine the price it pays? There are hazards in paying too little and in paying too much, as the New YorkTimes noted recently:

“Perhaps the biggest question about the Treasury’s acquisition plan is how the government will decide how much it iswilling to pay for the loans and securities it acquires. Will the government drive a hard bargain and acquire assetsfor the lowest possible price to protect taxpayers against losses? Or will the Treasury Department, in the interest ofjumpstarting the credit market, try to bolster large financial institutions likeCitigroup and Washington Mutual by paying a slight premium to the markets’ valuation of these troubled assets? Over theweekend, Treasury said it might use “reverse” auctions in which financial institutions rather than the Treasury — asbuyer — would submit bids.”

What else might get tacked onto any bailout legislation? That’s up in the air as well. Democrats are mulling severalpossible additions, including a provision that would allow bankruptcy judges to cram down mortgage loans and one thatwould restrict CEO pay. There is also talk of requiring banks that participate in the program to grant warrants orshares to the government. That would allow taxpayers to later recoup some of the cost of bailing the companies outnow.

Finally, there’s the biggest question of all to consider: How the heck is the government going to pay for all this?It’s not like we’re a surplus nation or anything. We’re already running a large budget deficit. We’ve already committedvast resources to bailing out Fannie Mae, Freddie Mac, AIG, and Bear Stearns. And now, we’re talking about adding asmuch as $700 billion more in bailout costs to the mix? No wonder Treasuries have gotten trashed in the past couple ofdays, and the dollar has fallen out of bed.

Bottom line: There are no easy answers at this stage, only a lot of unanswered questions.  That’s why both FedChairman Ben Bernanke and Treasury Secretary Henry Paulson took quite a beating in front of the Senate BankingCommittee today.

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