Nicolas Gelinas finds comfort in Treasury Secretary Paulson's decision not to use any of the $700 billion financial bailout money to purchase troubled assets from financial institutions in Paulson Bails Out the Bailout
Marano is not an aberration. He’s a representative of a dangerous way of thinking. Much of the financial industry still refuses to acknowledge that its business-model failure is permanent. Far too many people seem to consider that failure the result of temporary, extraordinary market conditions that are—to use a phrase that’s now become an unintentionally humorous cliché—worse than anticipated. But the notion that complex financial engineering could make any long-term security always instantly salable and nearly risk-free was one of the roots of this crisis. Acknowledging its absurdity isn’t a matter of punishment or demonization; it’s a matter of making sure that failed ideas stay dead, so that they don’t come back stronger than before.
But the government has been doing just the opposite. Further, by promising to buy mortgage-related assets, it has given companies like Rescap an incentive to hang on to their bad debt for as long as possible, rather than sell it to those annoying investors offering prices that are too low. And that has delayed what is already likely to be a long, painful recovery.
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To learn why, consider what got us out of our last major banking debacle, the savings and loan crisis of the late eighties and early nineties. William Seidman headed the FDIC in the eighties and later, as head of the federal Resolution Trust Corporation, handled the S&L aftermath. During that crisis, the U.S. government closed down failed S&L institutions and had to sell off their holdings. These holdings consisted of $600 billion in diverse assets, including office buildings, hotels, golf courses, and apartment complexes. “There was no real market” for such assets, Seidman said at Monday’s conference. “We decided we had to create a market. We said, we’re going to start selling these properties at whatever price we could get.”
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What Seidman sensibly dismissed back then—holding on to assets to “get prices up”—was, until Paulson’s announcement today, a key part of the government’s working plan to fix the current crisis. But it’s only when holdouts and their creditors capitulate and start selling assets to private investors at distressed values that the market can begin to find its way to recovery, just as happened in the early nineties.