Bad Loans

So the Bush administration wants to pay banks $700,000,000,000 in exchange for a pile of nearly worthless loans and securities. Make no mistake, this is a horrible deal. This is the Iraq of financial wars. First, how much money is $700 Billion? Iraq has cost $550 Billion so far, and the AIG bail out was $80 Billion. So this is a fantastic number.

Also, $1 Billion in $100 bills weights about 30.25 Metric tons (this is how we know) so $700 Billion would be 21,175 Metric Tons of cash. To compare, the huge Christ the Redeemer statue in Brazil weights about 1,000 tons, so the image on the left equals the weight, in $100 bills, of this bail out. Make my point?

My understanding is weak, so here are some better voices. First here is a easier to understand balance sheet from Ezra Klein:

"The easy analogy here is debt restructuring: If your business has $20 in the bank, and your creditor is demanding you pay back your full $100 loan next week, you're going to collapse. If you then restructure the debt so you pay back $10 a week, and you pay $120 in total, you may have lost more money, but you didn't collapse. The problem with the bailout plan is that we're supposed to be buttressing Wall Street against the possibility of collapse, but Paulson went a step further and constructed the government's approach to help protect against loss."

And, they are requesting that no oversight be given by anyone to how the money is spent.

So, more from Sebastian Mallaby here and from Paul Krugman here. The short version is there are far less expensive ways to keep the banking system solvent, and doing it this way will not only keep them afloat it will eliminate any losses they could occur on the bad loans they made! This could be the biggest one day re-distribution of wealth since the Russian revolution - but going the opposite way. And no one will notice.