The Paulson plan was a waste of money, academics say

Two academics at the University of Chicago have calculated the efficiency and the distributional effects of Treasury Secretary Henry Paulson's US$700 billion bailout plan for the US banking system and has found the deal created no value. "The Paulson plan did not create any value in the banking sector: it was simply a redistribution of money from the taxpayers to the investors in the major financial institutions, especially the debtholders," said Pietro Veronesi and Luigi Zingales Here's the abstract of the paper, which is well worth a read.

We calculate the efficiency and distributional effects of the largest ever U.S. Government intervention in the financial system. Possible systemic effects aside, we estimate that the revised Paulson plan increased the value of banks' financial claims by $133 billion at a taxpayers' cost of $112 -135 billions, creating no value. This result suggests that if banks were prevented from lending by a debt overhang, the plan was unable to overcome it. We compare the cost of Paulson's plan with the costs of alternative solutions that would have achieved the same objective in term of solvency of the banking system. We find that the revised Paulson plan is the most expensive for the taxpayers, second only to the original Paulson plan. The biggest beneficiaries of this massive redistribution were the debtholders of financial institutions, especially those of the three former investment banks and of Citigroup. The equityholders just broke even.