October 11th, 2008

Bank Bailout

The joke about the UK bank bailout is that the taxpayer is going to lend money to the banks so that they can lend it back at a higher interest rate and make a profit on the difference. But it seems more likely to me that the taxpayer is going to lend the banks money so that they can lend it back at a lower interest rate, and make a loss on the difference. Warren Buffett's similar (if private sector) bailout of Goldman Sachs pays him 10% interest, well above the rate of most bank loans and mortgages. And the banks don't need extra profitability at this time, they need extra liquidity, and if it makes them a loss that's a small price to pay for being able to keep going until they can rebuild their balance sheets and pay back the government loans.