Oppose the Treasury’s bailout plan

David Merkel details why the proposed Treasury bailout plan needs to be opposed. He asks all of us to contact our Congressmembers and tell them to oppose the plan and for bloggers to spread the word.

Here’s why:

The owners of bad assets should risk their equity before taxpayers put up one red cent. The government should not try to prevent financial failure, but prevent financial failure from spreading as a contagion. Common and preferred stockholders of failed institutions should be wiped out. Subordinated debtholders should take a haircut.

Second, the proposed bill is vague, and offers the Treasury a “blank check” to do pretty much what it wants. Section 8 states: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” Who are we kidding here? I don’t care how great the emergency may be, the other branches of government should be able to act as needed.

Third, there is nothing to assure that fair market value will be paid for assets. If an investment manager is hired, who could tell if he plays favorites or not? Clever investment firms will take advantage of the government and its agents, and only sell overpriced assets to the government.

Fourth, there is no easily identifiable upside for taxpayers here. If we bail out a firm, it should be painful, as it was for the GSEs and AIG, where most of the equity gets handed over to the government in exchange for a senior loan guarantee.

Fifth, though the name of the Resolution Trust Corporation has been invoked here, this is nothing like the RTC. The RTC only dealt with insolvent S&Ls. It did not try to keep existing S&Ls afloat.

This proposal is an expensive boondoggle and should be opposed by all. As one bit of evidence here, how many noticed that mortgage rates went up on the day the deal was announced?

That’s right, mortgage rates went up, when they should have gone down. Read Merkel’s entire post for his well-thought-out plan of what should be done.

Then oppose the current plan.