Sunday, March 22, 2009

The gnomes strike again

So all the cool bloggers from Paul Krugman on down have bashed the emerging details of the US Treasury rescue plan for banks. Much of the complaints concern who will bear the losses from the distressed assets that would be offloaded under the plan. Note that the losses have to be borne by somebody, and in a world of limited liability, that somebody is not going to be shareholders and managers -- to the full extent of the losses -- no matter what you do. But the specific complaint is that the plan results in huge gains for the incumbent banks, since they get to dump all the bad assets onto the government.

Last October, the Swiss central bank (SNB) took over $50 billion in bad Union Bank of Switzerland assets. The deal looks a lot like what the US Treasury is now proposing. The assets sit in a special purpose vehicle, StabFund, and SNB bears most of the risk of what the assets are worth. Third party valuation experts determined the sale price.

The above is a chart of the UBS share price on the Swiss stock exchange over the last year, plus the market index (in orange). You'd be hard pressed to see the supposed windfall to UBS shareholders. But the government has kept the economy from tanking, and it has kept politicians from coming up with new bills every day of the week to determine managerial compensation in its banks. Let's give Geithner and Obama a chance.

UPDATE: Brad DeLong defends the Geithner plan.

FINAL UPDATE: So does Andrew Sullivan, for whom the chance to be in opposition to Paul Krugman seems irresistible. Suggestion to Sully: if Krugman picks a fight over this one, ask him if he still stands by his 2008 assessment of Gordon Brown.

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