Chicago business school profs on the Paulson bailout

Paulson’s Gift:

By computing the value of the preferred equity and the warrants the Government will receive in exchange for the $125bn investment we obtain an estimate between $89 and $112 bn. Hence, the equity infusion costs taxpayers between $13bn and $36bn. We also estimate the cost of the debt guarantee extended by the FDIC on all the new bank debt to be worth $99bn. This brings the total taxpayers’ cost at between $112bn and $135bn. Hence, in the banking sector the plan destroyed between $3bn and $26bn.

During the event window (Oct 10-14), however, Mitsubishi confirmed the $9bn investment in Morgan Stanley. Consequently, part of Morgan Stanley return may be attributed to this positive news. When we exclude Morgan Stanley from the calculations, we estimate the plan net benefit between $4bn and -$17. In other words, Paulson’s plan simply amounts to a redistribution of money from taxpayers to the investors in the major financial institutions. Possibly a costly redistribution, in fact, where a fraction of the money transferred was lost.

In other news, Paulson is now saying he wants to shift the bailout from bad mortgage debt to consumer credit. I wonder if the payback for taxpayers will be any better and whether Paulson will change his mind again in two weeks time. Who’s sailing this sinking ship?