In an instant, the Treasury’s bailout plan has gone “from invisibility to inevitability,” but it’s a dangerous scheme marketed under false pretenses, writes Sebastian Mallaby in the Washington Post. Whatever the administration says, this isn’t like the 1989 savings-and-loan cleanup, which set up an entity to sell off loans the government was already stuck with. The White House now proposes to "buy up bad loans before the lenders go bust," making it a “financial war of choice.”
The administration is willing to bet $700 billion that “preemption will avert the mass destruction of banks.” Its brilliant plan is to actively shop and potentially overpay for loans no one can correctly value. A better option would be to force companies to cut dividends, issue shares and otherwise raise capital. It might sound nasty, writes Mallaby, but "taxpayers would be spared the experience of wandering into a bad-loan bazaar and being ripped off by every merchant." (More Henry Paulson stories.)
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