In The Market For A Better Banking Plan

The editors of “In the Market For a Better Banking Plan” are evaluating the Obama administration’s financial bail out package, which was announced this week. It appears to be a nonpartisan evaluation aimed at educated investors. The article is fairly complex in its terminology and has both positive and negative feedback. The authors are complimentary of the administration’s focus on cleaning up the balance sheets of non-bank financial firms. However, it is critical of the authority given to the Treasury to oversee this process. Not only do they think an independent third party would have been more effective than the Treasury’s management of this process, but they are highly suspect of the ultimate outcome being positive for the American taxpayer. The structure tends to reward private investors in positive outcomes and leaves toxic assets in the laps of taxpayers. An additional criticism is that current accounting rules make it difficult for some of the weaker financial institutions to maintain a healthy balance sheet. If these firms were able to maintain current asset values through these difficult economic times they would be in a much healthier position coming out of the recession. But because they have to adjust asset values that have temporarily declined in value, it gives the impression of weaker assets even though this might be a temporary situation. The authors also question the administration’s bailout structure as being too easy on Wall Street. They believe the public-private partnership tends to allow these Wall Street firms the opportunity to continue to make obscene fortunes. They would rather see an orderly process of bankrupting the insolvent firms, ultimately costing the taxpayers less money.

While I agree that Obama’s bailout plan is not without risk, there is greater harm that could come to our financial system with additional failures of these non-bank institutions. In order for our economic recovery to gain traction, investors must have increased confidence in the value of financial assets. Because Government backed assets are viewed as the safest investment, the bailout package provides the confidence investors are looking for to move forward in a recovery.