The Paulson Gift to Goldman Sachs

Jonathan Weil at Bloomberg explains that Paulson proposes to do more than just buy the troubled assets of incompetent and foolhardy banks and investment houses; Paulson proposes to pay them much more than those assets are worth:

Since the financial crisis began last year, banks worldwide have disclosed $519 billion of losses from writing down assets. Consequently, many of them don't have enough capital left to absorb more losses. And unless their stock prices go up a lot, they can't raise any more.

Under Paulson's plan, the Treasury will get as much as $700 billion to buy ``troubled assets'' from financial institutions. The word ``troubled'' seems to mean whatever Paulson wants it to mean. As far as I can tell, the only way this would help plug banks' capital holes is if the Treasury pays them much more than the assets are worth.

Even if Treasury pays 100 percent of the assets' balance-sheet value, banks still won't have enough capital. And as the whole world seems to know, the asset values on banks' balance sheets are grotesquely inflated. If Treasury pays only what they're worth, the banks would have to take more writedowns and admit to bigger capital shortfalls.

It is very difficult to see how we will recover more than a small portion of the $700 billion gift we are about to bestow on Morgan Stanley and Paulson's own Goldman Sachs -- this bailout looks a lot like the funding of the Iraq War, likely to cost us all a lot more than the optimistic Republicans promised.

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