The Paulson Plan
Is it Socialism?

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September 25, 2008

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As I see it, we are walking in the Land of the Suboptimal today. A bailout of any sort is an act of socialism. The government intervening on the private sector. The government shouldering the burden of an industry's poor performance. The government taking an equity stake in AIG. The government bailing out Fannie and Freddie (in fact, their creation in the first place was socialistic).

And nationalization of private enterprise does not work. It may work in the short term. But the long term results have been repeatedly dismal. Inefficiency. Bureaucracy. Often, corruption. And a grinding halt to innovation. Disruptions to the competitive flow of business. Governments should not run entities that -- through highs and lows, with bumps and bruisies -- private enterprise can administer to more effectively. And, in my experience, that is most things.

The problem here, however, is that the banking systems provides the lubricant to our entire commercial system. And this means not just large corporations but also small business and individuals. In a world where credit dries up, naturally, consumers get nervous. They then pull their money out of banks. And the entire system can shut down. In fact, the government chose to do very little (and what it did do actually choked capital from the system) in the Great Depression. There are countless reasons we do not want that to happen today.

Our position, mailed out today, says that we agree with the bailout. You can't have allow the system to shutdown. However, let's reduce the degree to which this is a sacrificial act. When Buffett negotiated with Goldman, he did not take common -- he took preferreds with a 10% interest rate. He got a beautiful deal. The same sort of deal should be struck in favor of the taxpayer for the purchase of any bad debts with our capital. This is exactly how Sweden bailed its banking system out, and the taxpayer ended up profiting.

Under the original plan -- which can and is being modified -- I think the taxpayer (we) got treated a little bit like chumps. True, the bailout must happen to keep capital out there fueling the system. BUT, why shouldn't banks that need to call on taxpayer capital suffer the same fortunes that AIG did. . namely, a dilution of their equity in the favor of the taxpayer (who is funding the deal).

I see the bailout as necessary. But I believe the taxpayer should be treated more favorably than the original plan offered. The simplest way to achieve that is to establish, as a precursor to relief of any bad debts, the transfer of equity from bank to the treasury, with the treasury selling equity down in years to come at its discretion. If I could encourage Fools to believe one thing it is that Henry Paulson is not a dark angel, maneuvering on behalf of his cronies. My assessment of the situation is that he acting in the best interests of the U.S. and its citizens.


Tom Gardner