Obama: We're Gonna Need a Bigger Boat
In another sign that the phrases "$1 trillion" and "new government powers" have lost their ability to shock, the Obama administration has hatched the next phase/new wave of bailouts. Some gory details:
[The plan] will create a new government entity, the Public-Private Investment Program, to help purchase as much as $1 trillion in toxic assets on banks' books. […]
[It] will give the government new resolution authority to take over troubled institutions that would pose a threat to the entire financial system if they failed. […]
Under the new powers being sought by the administration, the treasury secretary could only seize a firm with the agreement of the president and the Federal Reserve.
Once in the equivalent of a conservatorship, the treasury secretary would have the power to limit payments to creditors and to break contracts governing executive compensation, a power that was lacking in the AIG case. […]
The initiative will seek to entice private investors, including big hedge funds, to participate by offering billions of dollars in low-interest loans to finance the purchases. The government will share the risks if the assets fall further in price. […]
The regulatory plan is also expected to include a major change that gives the Federal Reserve more powers to oversee systemic risks to the entire financial system.
One key question that won't be answered by this or the next three bailouts, is: How big is "too big to fail"? Or conversely, how small is "big enough to get bailed out"? Consider that TARP I, which was authorized specifically for financial institutions, is now being applied to auto-parts manufacturers. "Systemic risks" are in the eye of the beholder; the beholder in this case is an explicitly political animal, ready and eager to turn momentary spasms of public anger into ridiculously self-defeating law, and now the animal wants still more unprecedented power. Seems to me there might be some problems with that set-up.
Reason on the bailouts here.