Newswise — Steven C. Kyle, Cornell University associate professor of Applied Economics and Management, comments on reports that the Treasury Department is already earning an 8.5 percent profit on its investments in bailed out banks.
“I am not surprised at this. While many naysayers were carping about 'throwing taxpayer money at big banks,' many of us who actually read the details were saying that it wasn't going to work out that way unless the banks went belly-up. If they didn't, they would pay back the money -- which is what happened.
"What is disappointing to me is that the Bush administration only went so far as to loan the money to the banks rather than taking a controlling equity interest in them. If the Feds put more money into a bank than the entire value of outstanding stock, as in some cases they did, then a good case could be made for taking direct ownership of the company. As a matter of fact, the Swedes did exactly this a few years ago.
"The upside of doing this is that rather than getting 8.5 percent on the repaid loans, the taxpayers would instead get to sell the equity back into the market at a much larger return. Also, if the government had a controlling stake we would not have to listen to news stories about greedy bank executives getting huge payouts. The government could simply pay them less. They aren't about to quit so there would have been little danger in doing this. In addition, you can bet that future stockholders would watch over risky activities a lot more closely than the old ones did.
"The downside of doing this would have been mostly political. It would be socialism. Indeed it would have been, but sometimes a little temporary socialism can really benefit the bottom line of the government, instead of the bankers. It would have been painted as a government takeover. This would be entirely correct until the equity was sold back to the market.
"Count me as one who is happy to see the money come back -- but disappointed it wasn't a whole lot more.”