LIANE HANSEN, host:
From NPR News, this is Weekend Edition. I'm Liane Hansen. Tomorrow, the Obama administration will announce the latest rescue plan for the financial system. No one knows exactly what's in the plan. Investors hope that whatever it is, it will bring stability. But NPR's Chris Arnold reports, there's no consensus on the best way to do it.
CHRIS ARNOLD: There are a bunch of competing proposals for what the government should do with that $300 billion it has left in the TARP bailout fund. And so, it's a very exciting time for economists like Simon Johnson at MIT.
Dr. SIMON JOHNSON (Entrepreneurship, Sloane School of Management, MIT): Well, I think this moment is a little bit like waiting for the Oscars to be unveiled. We know there are five finalists, and they are about to open the envelope.
ARNOLD: There's a lot riding on what's inside that envelope because there are plenty of people who think that the last administration had some blunders. Granted, the government was scrambling to respond to a series of damaging implosions at Bear Stearns, Lehman Brothers, AIG, a string of banks, and certainly the economy is better off than it would've been if the government had done nothing. But...
Dr. DAVID SWENSEN (Chief Investment Officer, Yale University): It was a completely inconsistent, incoherent mess.
ARNOLD: That's David Swensen, the chief investment officer at Yale University. Swensen is one of the sharpest investors in the world. He's made billion of dollars for Yale.
But Swensen says the government's unpredictable approach has made it difficult even for investors like him to know what's coming next. Swensen has just been named to President Obama's economic recovery advisory board.
Dr. SWENSEN: The government needs to follow simple, transparent, consistent policies with respect to recapitalizing the financial system.
ARNOLD: At the heart of the troubles facing the banks are still those bad loans and other toxic assets that are on their books. So, one idea out there is for the government now to buy up these toxic assets. They could then put them in a giant government run so-called bad bank. Simon Johnson...
Dr. JOHNSON: It's very much like you're a student. You have an old car. You poured a lot of money into repairing it. It keeps breaking down. And then you go to your dad and you say, look dad, this isn't working. Can you buy the car from me? And preferably pay more than market prices?
ARNOLD: Johnson thinks if the government didn't overpay for these bad assets, this idea has some merit. Right now, investors are spooked by this broken down car - that is these toxic loans on the banks' books.
Dr. JOHNSON: It's a bit like your girlfriend says, you know, unless you get rid of that car, we have an issue. So it's affecting all your relationships with everyone. It's just hanging over your life. You've got to get rid of it. There's no question.
ARNOLD: David Swensen, though, is not a fan of the bad bank proposal. Swensen says to do this, you'd have to have government buyers having to quickly make decisions on complicated securities that nobody really knows how to value.
Dr. SWENSEN: They have to negotiate a price for each individual asset. And that's going to be very, very, very hard for the government to do. I mean, the holder of the asset knows far more than the purchaser.
ARNOLD: Which, he says, is just a bad position for the government to put itself in. Swensen prefers the more simple approach of the government just investing a lot of money into the banks and getting preferred stock or warrants in return. It's what the government's been doing but in a much more consistent way. This is basically what Warren Buffett did late last year when he invested money to prop up Goldman Sachs.
Dr. JOHNSON: I think Warren Buffett is a great benchmark for us.
ARNOLD: Simon Johnson and most other economist agree that injecting more money into the banks has got to be a part of the administration's plan going forward. But Johnson wants the government to make sure that it's getting a fair deal.
Dr. JOHNSON: And I think comparing what we get as taxpayers with what Warren Buffett gets is entirely reasonable. I don't think we'll ever do quite as well as Warren, but we should get close, and to be honest, we didn't get anywhere near the terms that he got in the fall.
ARNOLD: Johnson says per dollar invested, Buffet stands to make many times what the government would get as financial institutions recover. So to avoid a really damaging deficit, Johnson says the government has to strike better deals to make sure it gets paid back all it can. Chris Arnold, NPR News.
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