US bank rescue plan doomed, Stiglitz says

Bloomberg

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"All the ingredients they have so far are weak, and there are several missing ingredients," Stiglitz said in an interview Thursday. The people who designed the plans are "either in the pocket of the banks or they’re incompetent."

The Troubled Asset Relief Program, or TARP, isn’t large enough to recapitalize the banking system, and the administration hasn’t been direct in addressing that shortfall, he said. Stiglitz said there are conflicts of interest at the White House because some of President Barack Obama’s advisers have close ties to Wall Street.

"We don’t have enough money, they don’t want to go back to Congress, and they don’t want to do it in an open way and they don’t want to get control" of the banks, a set of constraints that will guarantee failure, Stiglitz said. The return to taxpayers from the TARP is as low as 25 cents on the dollar, he said. "The bank restructuring has been an absolute mess."

Receivership
Rather than continually buying small stakes in banks, weaker banks should be put through a receivership where the shareholders of the banks are wiped out and the bondholders become the shareholders, using taxpayer money to keep the institutions functioning, he said.

The Public-Private Investment Program, PPIP, designed to buy bad assets from banks, "is a really bad program," Stiglitz said. It won’t accomplish the goal of establishing a price for illiquid assets clogging banks’ balance sheets, and instead will enrich investors while sticking taxpayers with huge losses, he claimed.