Summary

Many are enamored of recapitalizing the banking sector by injecting government funds into distressed banks in exchange for preferred stock and equity warrants. This appears to be the core of the Treasury's most recent plan. Jonathan Carmel points out that this approach can actually create more problems than it solves by adding to the bank's debt overhang problem. If public funds are to be used, a better approach is to directly capitalize the banks by buying common stock and distributing it to taxpayers, suggests Carmel.

Recommended Citation

Carmel, Jonathan (2008) "Paulson's Latest and an Alternative: Why the Treasury Should Buy Common, Not Preferred, Stock and Why LIBOR Deposit Guarantees Could Backfire," The Economists' Voice: Vol. 5 : Iss. 6, Article 5.
DOI: 10.2202/1553-3832.1444
Available at: http://www.bepress.com/ev/vol5/iss6/art5