Nouriel Roubini: Bailout benefits only banks and their unsecured creditors

[Joanne98]

There were many other options.

* * *

By Nouriel Roubini
Roubini's Global EconoMonitor
Sunday, September 28, 2008

http://www.rgemonitor.com/blog/roubini/

Is purchasing $700 billion of toxic assets the best way to recapitalize the financial system? No. It is rather a disgrace and ripoff benefitting only the shareholders and unsecured creditors of banks.

Whenever there is a systemic banking crisis there is a need to recapitalize the banking/financial system to avoid an excessive and destructive credit contraction. But purchasing toxic/illiquid assets of the financial system is not the most effective and efficient way to recapitalize the banking system. Such recapitalization -- via the use of public resources -- can occur in a number of ways: purchase of bad assets/loans; government injection of preferred shares; government injection of common shares; government purchase of subordinated debt; government issuance of government bonds to be placed on the banks' balance sheet; government injection of cash; government credit lines extended to the banks; and government assumption of government liabilities.

A recent International Monetary Fund study of 42 systemic banking crises across the world provides evidence on how different crises were resolved.

First of all, only in 32 of the 42 cases was there government financial intervention of any sort; in 10 cases systemic banking crises were resolved without any government financial intervention. Of the 32 cases where the government recapitalized the banking system, only seven included a program of purchase of bad assets/loans like the one proposed by the U.S. Treasury. In 25 other cases there was no government purchase of such toxic assets. In six cases the government purchased preferred shares; in four cases the government purchased common shares; in 11 cases the government purchased subordinated debt; in 12 cases the government injected cash in the banks; in two cases credit was extended to the banks; and in three cases the government assumed bank liabilities.

Even in cases where bad assets were purchased -- as in Chile -- dividends were suspended and all profits and recoveries had to be used to repurchase the bad assets. Of course in most cases multiple forms of government recapitalization of banks were used.

But government purchase of bad assets was the exception rather than the rule. It was used only in Mexico, Japan, Bolivia, Czech Republic, Jamaica, Malaysia, and Paraguay. Even in six of these seven cases where the recapitalization of banks occurred via the government purchase of bad assets, such recapitalization was a combination of purchase of bad assets together with other forms of recapitalization (such as government purchase of preferred shares or subordinated debt).

In the Scandinavian banking crises (Sweden, Norway, and Finland), which are a model of how a banking crisis should be resolved, there was not government purchase of bad assets. Most of the recapitalization occurred through various injections of public capital in the banking system. Purchase of toxic assets instead -- in most cases in which it was used -- made the fiscal cost of the crisis much higher and expensive (as in Japan and Mexico).

Continued>>>
http://www.gata.org/node/6688

[moodforaday]

1. What does HE know? He's only been

warning of this happening for the last six years or so. Besides, Bush would never manufacture a panic to ram through the legislation that he wanted. He's too incompetent to do that.

[Yo_Mama_Been_Loggin]

2. Very good article

The best I've seen as to why we need to approach this with caution.

[lostnotforgotten]

3. Roubini Has Been Atop This Issue For Almost Two Years Now

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