The Washington Post misleadingly told readers that the government turned a profit when it acquired the assets of the bankrupt savings and loans in the 80s and sold them off. It's true that the government made money on the sale of these assets, but that was after it had already shelled out close to $100 billion to deposit holders in the S&Ls. The decision to auction off the assets of the bankrupt S&Ls was likely better than alternative options, but it still left the government with a very big bill. If the government were to take a comparable approach to the current mortgage crisis, it should first require that financial institutions like Citigroup, Merrill Lynch, and other holders of large amounts of bad assets go bankrupt, wiping out their shareholders' equity. Then the remaining assets of these institutions would be sold off at whatever price the market offers. This may be the best available option for taxpayers and the economy, but the bankruptcy and liquidation of many major financial companies would be a prerequisite for going this route. The proposal being considered, as described in the article, seems more like a simple government bailout of financial institutions, which is not at all comparable to the S&L auctions of the 80s.
--Dean Baker
