Do you remember the original TARP? It was supposed to be a fund to buy toxic assets from US banks. As it often happens in politics, by the time it was implemented it did anything but and was used to recapitalize the banks in favorable terms using government money to buy equity without forcing anybody to take losses on their past loans. It was a gentlemen agreement of sorts, which allowed the banks to come back strong even if it did nothing for the broader economy. Adding insult to injury, many large banks purchased even more of the same toxic assets they were supposed to sell. Since they never clean up their balance sheets they never looked to expand it by making new loans.
Tim Geithner, our esteemed secretary of the Treasury, was a major supporter of the idea that helping the banks helps the economy. Except that helping the banks, as most things in economics, may mean different things to different audiences. For instance, a pre-packaged bankruptcy may help the bank clean up its balance sheet without impacting the debt, thus, avoiding a Lehman-like crisis. It does, however, wipe out the equity and prefer equity, which is what the executives running said banks own. You can already guess who prefers which solution. Geithner, if you do not know already, consults the top executives of the same banks he bailed out on a permanent basis.
Now, apparently, it is Geithner's time to help European bank(er)s (Earlier on Thursday, U.S. Treasury Secretary Timothy Geithner voiced optimism that Europe would devote more of its own resources to backstop euro area governments and banks under stress). Again, the story is as simple or as complicated as you want to make it. The European banks own some toxic assets. Whether they are real estate loans in Spain, Italian government debt in Italy, or Greek bonds and loans in France, it doesn't matter. The fact is that all of these banks are currently reporting these assets at values far above fair prices (yes, Virginia, bankers do that on a regular basis and get away with it). As it is usually the case, they do not want to take the losses unless they have to which means they won't take the losses unless they are forced by a regulator or go bankrupt, whichever comes first.
Given past performance, you can be sure that Mr. Geithner is NOT advocating that the banks are forced to clean up their balance sheets. So any plan of his, will involve some form of free money (government guarantees, mispriced equity warrants, etc) that allows the banks to avoid writing down the losses. As you can see, with American and Japanese banks (yes that is exactly what they did in the 90s), this preserves the (zombie) bank while condemning the rest of the economy to a Japanese like "recovery."
Capitalism needs failure as much as it needs success. The Japanese have been trying to absorb the mistakes they socialized in the early 90s and they are still trying. Apparently, we are on our way to doing the same.
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