Risks of a blanket bailout

29 September 2008

The $700-billion bailout plan proposed by US treasury secretary Henry Paulson is bad in principle and will create more problems in the long term than the short term fixes it offers. By Shivshanker Verma

The day after he announced the $700-billion bailout plan, US treasury secretary Henry Paulson did a series of interviews to drum up support for the plan. Like most politicians, he blamed the excesses of Wall Street for the crisis.

Paulson talked about "bad lending practices", "irresponsible borrowing", "irresponsible lending", "overly complex securities" and "rating agency failures". At the hearing before the US Congress to present the plan, Paulson even said "it is embarrassing to look at this".

That was quite rich from Henry Paulson who was, until as recently as 2006, the CEO of the firm that was the most profitable during the boom - Goldman Sachs. He presided over the firm during those golden years when the huge explosion in credit derivatives brought unprecedented riches to Wall Street. He didn't realise the risks inherent in the system then, but does very clearly now.

Not only that, he left the firm for the government at the peak of the boom. In other words, he managed a perfect bailout for himself back in 2006. Now, he wants to offer a bailout to the rest of the world.

The bailout plan from Paulson has something for everyone to criticise, except maybe the bankers who will be the biggest beneficiaries.

It is bad in principle and will create more problems in the long term than the short-term fixes it offers.