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Stephen Long joins Lateline -

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Reporter: Leigh Sales

LEIGH SALES, PRESENTER: Here is our regular Friday chat on all matters economic and financial with
economics correspondent Stephen Long. Stephen, the Obama administration has been angry at Wall
Street, as we know, particularly over the bonuses, but then this week President Obama has said, "We
can't just stay angry forever at people who seek to make a profit or entrepreneurs because they're
a necessary part of the recovery plan." A subtle but significant shift in rhetoric there?

STEPHEN LONG, ECONOMICS CORRESPONDENT: Very much so, Leigh, and it's going to be crowned in a few
hours time when President Obama and key aides meet with banking executives from about 15 banks and
they will pledge support for the Obama bank rescue plan and President Obama and his aides will
pledge support for Wall Street. A happy marriage yet again. There's some interesting politics at
play, quite apart from the fact there were death threats going to bankers and AIG executives and
even a Republican Congressman had suggested that they might want to commit suicide, which doesn't
play too well, I guess - you might think things had gone a bit too far. I think, basically, they're
ideologically committed to Wall Street. They want to bail out the Wall Street banks. And so they
can't afford to let the public anger go too far or the congressional anger go too far.

LEIGH SALES: So what do you make of the Geithner plan?

STEPHEN LONG: Well, it's a great deal for the shareholders of the Wall Street and other commercial
banks in America, because in effect this is a massive public sector subsidy to those banks, and at
great risk to the American taxpayer. What they are in effect doing is a disguised money push
towards the banks, and it's very much disguised. And essentially how it works is that the taxpayer
will be bearing 90 per cent of the risk, but the up side will be shared 50-50 between the
government and the investors in the banks, if there is an upside. So, what they're trying to do is
encourage hedge funds and other entities to invest in the toxic assets. Now, why are they called
toxic assets? Because no-one wants to buy them. So, what they're doing is they're saying, "Well, if
you put up say $6 million ..." - say, you know, you've got $100 worth of bad bank debt and you
convince a hedge fund or a private equity investor to pay $84 for it, well they put up $6; the
state puts up $6; $72 comes from the Federal Deposit Insurance Corporation as a loan. So, you work
that out and basically the risk is all with the taxpayer. It's a non-recourse loan; so, the
investor only loses as much as they put in. So if it goes bad, the taxpayer bears all the losses,
otherwise the upside is equally shared. So they're basically trying to get people to overpay for
these assets beyond their market value.

LEIGH SALES: OK, so it's pretty risky. Will it work?

STEPHEN LONG: Well, the risks are clear for the taxpayer. Will it work? The answer is really, "Who
knows?" But there are also risks for the banks, because if they can't convince investors to pay top
dollar for this, if they pull back from that, it will actually set a market price, and if that's a
low market price then you'll have another round of banking write-downs and losses. So, it's a
high-risk venture really, but the politics of this is they can't go back and ask for more bailout
money from the Congress because of the anger.

LEIGH SALES: Well I suspect we're probably going to be talking about this for a few Friday nights
yet. Stephen Long, thank you very much.

STEPHEN LONG: You're welcome.