Michael Barone makes a very interesting observation. The Geithner plan, finally unveiled on Monday, relies on unregulated firms to bail out the regulated ones. It’s hard to excerpt, but here’s the main point:
I have noticed what I think is a paradox in the Geithner plan. He is asking the most unregulated parts of the financial system—hedge funds, private equity firms—to bail out the most regulated part of the financial system—the banks. . .
Geithner, as I see it, is asking the unregulated players—the hedge funds and private equity firms—to do what Wallison recommended that the government do, buy the troubled assets “at their ‘net realizable value,’ which is based on an assessment of their current cash flows, discounted by their expected credit losses over time.” He’s trusting the unregulated players, rather than the government, to discover what that value is, by subsidizing their investments while limiting their downside risk. The government provides six-sevenths of the price, gets half the profits, but doesn’t have recourse to go back to the investors to recover losses. The unregulated players have great leverage to make profits while their losses are limited to their outlays.
This may work as intended. I certainly hope so. But it does give us some things to keep in mind as we ponder how financial markets should be regulated in the future. We don’t want to regulate every player strictly. There is a place for unregulated operators. And tight regulation will never automatically protect us against systemic risk. We need to keep our eyes open for areas where we need tighter regulation and where we don’t.
(Via Instapundit.)
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