Professors Criticize Plan for Swift Bailout

Even as economists, government officials, and Wall Street executives try to get a handle on how the economic crisis grew so large and so fast, debate has broken out over the bailout plan currently under review by Congress.

A number of Harvard professors have signed on to a letter—authored by Paola Sapienza at the Kellogg School of Management at Northwestern and Luigi Zingales at the University of Chicago Graduate School of Business—which calls on congressional officials to take more time in considering the provisions of the bailout and expresses concerns about the plan’s fairness, ambiguity, and long-term effects.

“The plan is a subsidy to investors at taxpayers’ expense,” the professors wrote. “Investors who took risks to earn profits must also bear the losses.”

“For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action,” the professors added.

Oliver Hart, a former chairman of the Harvard economics department, signed the letter out of a concern that the bailout plan is being created in an unnecessary rush.

“I am skeptical as to whether this is the right plan,” Hart said. “There’s a lot of detail missing regarding which assets will be bought and on what terms. We’re meant to trust the Treasury to enact this plan in a reasonable manner, but they want a carte blanche, and this is worrying.”

David S. Scharfstein, a professor of finance and banking at Harvard Business School, signed the letter because he said he believes that the plan does not have enough long-term components to deal with the systemic problem.

“My main concern with the bailout plan is that there are no real provisions to increase the financial health of the banking sector,” Scharfstein said. “The government should include an increase in capital requirements as part of the bill and force the banks to issue stock, recapitalize, and put themselves in a healthier financial situation.”

Scharfstein noted that Warren Buffet’s purchase of $5 billion of Goldman Sachs preferred stock was a step in the right direction.

“But I don’t think that banks will issue more equity without prodding from the government,” Scharfstein said.

—Staff writer Prateek Kumar can be reached at kumar@fas.harvard.edu.