The hallmark of Republican economic policy is to offer insignificant tax cuts to the majority of people while plundering the national treasury by providing huge tax cuts to a few people. They are at it again with the next proposed bailout of financial institutions. The only questions is will Democrats go along with this latest Republican heist. If they do it will probably cost Obama the election as Ralph Nader's candidacy will acquire new meaning.
The bailouts of Fannie, Freddie and AIG by the Federal Government at least required that the common shareholders and preferred shareholders were required to take massive write downs- although I would have preferred that they had been wiped out completely. But judging from the new proposal being floated by the administration to buy "toxic assets" from financial institutions the latest bailout will not require such a write down. All that is required is that the assets be purchased at "market value".
The problem with that premise is that (a) a "market price" depends on a market in which assets are being bought and sold freely and that doesn't exist and (b)nobody knows what the "market value" of the securities are in the first place. That's the basic reason for the financial uncertainty
Thus while the Administration would like to represent that the assets are being purchased at "market prices" what will in fact happen is that some political appointee gets to decide what the market value of the securities are and that will be labeled as a "market price". To whom will that person turn to in order to establish what the hypothetical market value of the security is? Wall Street! They would of course provide an honest valuation- yeah right if you believe that I have a bridge to sell you. Naturally Wall Street will put the highest value possible on these securities and you and I as tax payers will get stuck holding the bag for future declines. The net effect the fat cat bankers who got us into this mess in the first place walk away with their stock, salaries and bonuses in good shape while the rest of us pick up the tab.
The justification for this Treasury heist- if they didn't do it then the average person the street will suffer. Does this sound a lot like the Republican tax cuts? In the guise of taking care of the average Joe provide a big hand out the fat cats. The only question is will Democrats start behaving like Republicans?
A far better solution is for the Treasury/Fed to come up with a valuation of these "toxic securities". Require all financial institutions to use these valuations to "mark their assets to market". Those that have negative capital after the valuation are taken over by the Government. Those that are under capitalized are given a certain amount of time to rebuild their capital base failing which they are taken over with all the common and preferred equity wiped out. While in my solution the government still gets the toxic assets (if takes over financial institutions) it also gets ownership of the residual institution which can be sold in the market at a profit to help defray the costs of the toxic assets.