The Mother of all Golden Parachutes

 Yesterday, the government stepped in to save  Wachovia bank , arranging for Citibank to take over the healthy parts  of Wachovia at a  bargain price . But wait! Today, that deal was cancelled : Wells Fargo made a deal to merge with Wachovia (a stock swap - no government cash involvement) making it the largest US bank. The taxpayer is off the hook. 

[Update:It now appears Citibank is going to try to block the Wachovia-Wells-Fargo merger and hold the US government to its deal to take on Wachovia's bad debts.  Wachovia didn't  get shareholder approval for the government deal - which would have screwed them  and cost the taxpayers a lot. When the merger with Wells Fargo was announced Wachovia's stock price  rose 80%.

Wachovia and Citigroup are wrangling in court with a $50 million hedge fund located in the Channel Islands. The reason: A dispute over two $10 million credit default swaps covering some CDOs. What's most revealing is that these huge banks put their faith in a Lilliputian fund (in an inaccessible jurisdiction) that was risking 40% of its capital for just two CDS. ]

 If the government wants to save failing  banks before they take others down with them, it should choose the direct path: put  capital into them. Take ownership stakes in return. And, where that's not feasible, seize them and sell their assets in an orderly way, just as the Resolution Trust Corp. did after the 1980s savings-and-loan crisis.

 Paulson proposes  to save the financial system from the evils of "structured finance" through more structured finance.There are reasons this may make things worse rather than better, as this is a global  crisis. Globally there are $600 trillion in world liabilities, plus more than $400 trillion derivatives. 

 Congress is going to let him do it his way, it seems: they are going to play along with  the game  "to save the system, " for which they, too,  bear responsibilty.

The authors of the following article note, "The US Congress and governments in other industrial countries have to reconsider the role of central banks if a degree of financial stability is to be restored." :

The mother of all golden parachutes

http://www.atimes.com/atimes/Global_Economy/JJ04Dj03.html

"Conventional wisdom in Washington believes that a slightly modified version of Treasury Secretary Henry Paulson's initially US$700 billion bank bailout plan will pass the House of Representatives on Friday following the Senate's approval on Wednesday...."