A hat tip to Jim Leff who passed along a link to an article by University of Chicago Professor Luigi Zingales on why Paulson is wrong with the bailout plan he is trying to foist on the American people.
The Paulson plan, at a cost of $700 billion to the taxpayers is nothing but a golden parachute for those greedy investment banking and fund managers who facilitated the disaster at hand. Instead of holding these individuals and corporate entities responsible for their bad judgment, the Paulson plan let’s them off the hook, to be bailed out by all the rest of us. Zingales lays out a more appropriate remedy to the situation:
When a profitable company is hit by a very large liability, as was the case in 1985 when Texaco lost a $12 billion court case against Pennzoil, the solution is not to have the government buy its assets at inflated prices – the solution is Chapter 11. In Chapter 11, companies with a solid underlying business generally swap debt for equity. The old equity holders are wiped out and the old debt claims are transformed into equity claims in the new entity which continues operating with a new capital structure. Alternatively, the debt holders can agree to trim the face value of debt in exchange for some warrants.
Even before Chapter 11, these procedures were the solutions adopted to deal with the large railroad bankruptcies at the turn of the twentieth century. So why is this well-established approach not used to solve the financial sectors current problems?
Zingales goes on to write that in the current situation Chapter 11 actions would be too time consuming, but he does suggest alternatives that Congress and the administration ought to consider.;
The Paulson plan is just another typical Bushliburton strategy of using scare tactics to force Congress and the American people to jump when Bush pulls the chain. Do we really trust anything coming from Bushliburton anymore? Allowing Henry Paulson (former CEO of Goldman Sachs) is in essence giving the fox the keys to the hen house. Bushlliburton policies and management of the country have put us in this postion, and now as a final bad act of their administration, they will apply the Coup de Grâce to the taxpayers.