Will Yank banks thank Hank?

Tonight’s Senate vote on a revised package of measures to support the ailing US financial system is widely debated in today’s papers.

Martin Wolf, in the Financial Times, describes the refusal of Congress to back Treasury Secretary Hank Paulson’s original rescue package as “both understandable and a gross error”. Whilst sympathising with the reluctance of many US voters and their representatives to “bail out the undeserving rich”, and accepting that the plan was flawed, Wolf argues that it was nonetheless wrong to reject the Paulson plan because the effect would be to hurt the weak and undermine the validity of the market economy. Moreover, Wolf notes, the impression of government impotence at such a time is “the worst possible message”. He concludes by urging the passing of the revised plan, suggesting additional measures to ensure its success, and finding reassurance in Churchill’s comment that “The United States invariably does the right thing, after having exhausted every other alternative.”

The BBC’s business editor, Robert Peston, is also concerned about the “sense of powerlessness to direct events in global markets” following the House of Representatives’ rejection of the original bail-out plan on Monday. “What’s needed”, Peston argues, “is some sign that the White House and Congress do have the ability to mend ailing US banks. At the moment, it’s the breakdown in the US political system that’s doing as much damage as the breakdown in the banking system.”

Jeff Randall, in the Daily Telegraph, evidently disagrees, taking a line closer to Main Street than Wall Street. “There is”, he argues, “a conspiracy of bankers and politicians whose self-interest is masquerading as sophisticated policy. They want us to believe that they have the keys to salvation. I have not seen a scrap of evidence to confirm this.” Admitting to holding an unfashionable view, not to mention running counter to Telegraph editorial policy, Randall nonetheless supports Congress in asking the US federal authorities “If you guys know so much about banking, how come we are in such trouble?”

The Independent’s Jeremy Warner is also untroubled by events in Washington. He suggests “America should be proud, not ashamed, of the rows and hold-ups we've seen in Congress over the past week on the Paulson plan. Those who see it as indicative of a political and economic system in failure have got it completely wrong. To the contrary, it is the hugely uplifting spectacle of free market democracy in action.”

An interesting perspective is given by George Soros, writing in the FT. His view is that, while a plan is needed, US taxpayers’ funds could be used more effectively. “Instead of just purchasing troubled assets the bulk of the funds ought to be used to recapitalise the banking system. Funds injected at the equity level are more high-powered than funds used at the balance sheet level by a minimal factor of twelve...In practice, the effect would be even greater because the injection of government funds would also attract private capital. The result would be more economic recovery and the chance for taxpayers to profit from the recovery.”

The Soros system would be implemented by bank examiners rather than Wall Street firms, to establish how much additional equity capital each bank needs to be fully capitalised, and granting public funds only if private equity cannot be raised. The Troubled Asset Relief Programme (Tarp) would then invest in preference shares, with warrants attached but carrying a low coupon (say 5%) encouraging banks to continue lending, and giving shareholders the right to subscribe, on Tarp’s terms. These rights would be tradeable, and Soros claims, would be hugely attractive to private investors like himself, with the result that the ultimate cost to the taxpayer could come in at under $500bn. He concludes that “a revision of the emergency legislation along these lines would be more equitable, have a better chance of success, and cost taxpayers less in the long run.”