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Financial System Watch

By Dan Froomkin
1:38 PM ET, 02/ 2/2009

David Stout writes in Sunday's New York Times: "Treasury Secretary Timothy F. Geithner will soon announce a new strategy for reviving the country's financial system while making sure that banking executives do not misuse federal money meant to assist their companies, President Obama said Saturday in his weekly address."

"The president said the goal of the strategy would be to get credit flowing again to families and businesses....

"The administration, the president said, would ensure that chief executives 'are not draining funds that should be advancing our recovery'...

"Administration officials have said that restrictions on executive pay at companies benefiting from the rescue program may be announced this week. Later, perhaps next week, revisions in the program will be announced under which the most toxic assets of the banks will be bought up or guaranteed, so that the institutions will have incentives to unclog the credit streams."

Vikas Bajaj and Stephen Labaton write in the New York Times: "As the Obama administration prepares its strategy to rescue the nation's banks by buying or guaranteeing troubled assets on their books, it confronts one central problem: How should they be valued?

"Not just billions, but hundreds of billions of taxpayer dollars are at stake....

"Placing too low a value would force institutions selling and others holding similar investments to register crushing losses that could deplete their capital and make it harder for them to increase lending.

"But inflated values would bail out the companies, their shareholders and executives at the expense of taxpayers, who would swallow the losses if the government could not recoup what it had paid."

Paul Krugman writes in his New York Times opinion column: "Question: what happens if you lose vast amounts of other people's money? Answer: you get a big gift from the federal government — but the president says some very harsh things about you before forking over the cash...

"I'm talking, instead, about the administration's plans for a banking system rescue — plans that are shaping up as a classic exercise in 'lemon socialism': taxpayers bear the cost if things go wrong, but stockholders and executives get the benefits if things go right....

"In normal times, banks raise capital by selling stock to private investors, who receive a share in the bank's ownership in return. You might think, then, that if banks currently can't or won't raise enough capital from private investors, the government should do what a private investor would: provide capital in return for partial ownership.

"But bank stocks are worth so little these days — Citigroup and Bank of America have a combined market value of only $52 billion — that the ownership wouldn't be partial: pumping in enough taxpayer money to make the banks sound would, in effect, turn them into publicly owned enterprises.

"My response to this prospect is: so? If taxpayers are footing the bill for rescuing the banks, why shouldn't they get ownership, at least until private buyers can be found? But the Obama administration appears to be tying itself in knots to avoid this outcome."

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