Paulson doesn’t know what to do, but he finally realized that “buying bad loans is a bad idea”:http://www.nytimes.com/2008/11/13/business/economy/13bailout.html?hp:
bq. Mr. Paulson said the $700 billion would not be used to buy up troubled mortgage-related securities, as the rescue effort was originally conceived, but will instead be used in a broader campaign to bolster the financial markets and, in turn, make loans more accessible for creditworthy borrowers seeking car loans, student loans and other kinds of borrowing.
We don’t even know how much he’s spent on buying bad loans yet, i.e., wasted money by his own admission, since the bailout is not transparent. This is why government bailouts are a bad idea… one guy with little incentive trying to solve a problem that thousands of people with big incentives couldn’t solve is unlikely to work.
He talked about the executive management compensation:
bq. “Poorly designed management compensation policies can create perverse incentives that can ultimately jeopardize the health of the banking organization,” the agencies said, adding that they expect banking institutions “to regularly review their management compensation policies.”
In other words, paying high salaries to executives can encourage them to do things that harm their organizations. This is news? The more you pay someone, the more likely they’re going to think short-term rather than long-term. You put the carrot just out of reach so they keep working to get it, you don’t let them gorge on carrots so they have no incentive to work.