Profiting from the bailout

September 23, 2009

What is it with this belief that somehow the federal government’s role should be to profit from the bank bailout?

I thought the purpose of the bailout was to save the financial system from collapse.  And that’s why I supported it last fall–even if it was poorly designed and poorly explained to the public.

If the government could somehow make money on its capital infusions, so much the better. But making a profit on the bailout–or even getting back all the government’s money–was not critical to judging the success of the bailout.

Now don’t get me wrong, I have no problem with the government recouping its investment. But the main goal of the bailout was to avert another Great Depression.

By that score, the bailout was a success. But big problems remain: banks still have too much toxic securities on their balance sheets and there’s serious doubts about the longterm viability of the biggest bailout recipients–Citigroup and AIG.

That’s why I called on the Obama administration to get tough with AIG and put into works a plan for dissolving the defacto government owned insurer. Forcing AIG to sell off it parts ASAP would recoup some of the $120 billion still owed to the government.

Critics contend my approach is wrong and it makes sense to keep AIG together as long as possible for the government to be made totally whole. But that assumes AIG is a viable company–something I don’t think it is.

More to the point, it’s worth taking a loss on the government’s investment, if the dissolution of AIG reinstates some moral hazard on Wall Street.

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