Senator Schumer came up with what I think is a really good idea, although I think it could be modified a bit. His idea - rather than charging specific companies fees or equity participation for participating in the bailout program, charge a general insurance fee to all (“large”) financial institutions to provide a fund that would protect taxpayers from eventual losses. I like that idea because it socializes the losses among the financial institutions rather than the general taxpayers. It also resolves the objection Paulson has to protecting taxpayers by charging specific participants. Paulson's concern was that institutions would not participate if there is a cost involved. I think that’s a stretch for taxpayers, but Schumer’s idea isn’t a bad compromise. I would like to see a substantial required contribution into the insurance fund at the expense of dividends if necessary. After all, in the end we want capital to flow to financial institutions on a net basis but we want the ultimate protection to come from the owners of the financial institutions. If we simply charge an insurance fee over time it will ultimately be passed along to taxpayers anyway through higher costs for banking as the fee is built in to the cost structure of these institutions.
Sphere: Related ContentTuesday, September 23, 2008
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And what about global competition? More governmental chargers on American companies is a benefit to foreign companies competing with them.
Not necessarily. What of the charge is paid from what would have been dividends? It would make it difficult to raise equity for a while, but they can't now anyway and they are getting capital infusion from the plan.
Wouldn't that make the companies unattractive to investors making it more difficult for a troubled company to recover and perhaps make non-troubled companies closer to being troubled?
It would make them less attractive to investors in one way but at the same time the purchase of the toxic assets at above-market prices improves the balance sheet making them more attractive. The improvement comes at taxpayer risk, so why shouldn't taxpayers participate in the upside at least to the extent of any losses incurred on the securities purchased? Take a look at the Buffet deal with Goldman.
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