Tomorrow will bring the unveiling of the Obama administration’s overhaul of the Henry “Hank” Paulson bank bailout, the Troubled Asset Relief Program (TARP). [Apply for funds here.] From the leaks emerging, it looks like a significant portion of the scheme will amount to this: the government will lend money to hedge funds and the like at subsidized rates to buy toxic assets from banks – and the gov will guarantee the investors against losses. Evidently, the administration thinks the toxic assets are being underpriced by the markets. If they’re right, the buyers will make money. If they’re wrong, then we all pay.
From the hedgies point of view, it’s all reward, no risk. Even if the rewards don’t materialize, what have the hedge funds lost? What the public gets out of this is impossible to specify, aside from the risk of massive losses.
I hope this isn’t really what will emerge. But if it is, the Obama administration will have broken new ground in awfulness. The same formula that brought us this mess, an indulgent government encouraging reckless operators playing with other people’s money, will be applied towards solving it. It makes no damned sense.
Well, maybe it does in the most cynical way. Hedge funders like Chicago’s Kenneth Griffin wrote Obama big checks during the campaign season. (For some details, see here and here.) Obama’s top economic advisor, Larry Summers, worked for a hedge fund (D.E. Shaw) after he got fired from Harvard. And no doubt Treasury Secretary Tim Geithner would like a multimillion dollar job on Wall Street after he leaves public service, just like Robert Rubin got at Citigroup after engineering the repeal of Glass-Steagall.
Can things really be this bad? We report; you decide.