PastTense

5 Perverse Bailout Consequences

A lot of people on SA don't believe these banks are actually fundamentally profitable; that there are massive unrealized losses out there.

Paulson in a State of Panic

1. If firms are basically worthless because they decided to make massive amounts of poor investments and bad loans there is no reason whatsoever for equity owners to receive anything at all. This is true for massive numbers of businesses of all kinds--and the answer is the same for all of them--let the investors lose all their money. Don't you understand the basic fundamental concepts of capitalism?

2. The only reason for the government to engage in any bailouts is the effect of financial failures on the broader economy. So any government programs should be totally oriented toward this. Thus a total guarantee of deposits or goverment loans or equity investments is a much, much better proposal than the government buying junk assets from banks. The original bailout proposal was simply a proposal to move the losses for the banking industry's bad loans from the banks (where it belonged) to the federal government.