More Leverage Won't Solve Bank Mess

Back in April, Dealbook's Andrew Ross Sorkin criticized the PPIP, saying it was "trying to stabilize the system by adding more risk, not less risk, to the system." It appears that this new maneuver would add a further level of risk to the program, all of it concentrated on the taxpayer, for the further relief of the exposures born by the banks. First we had questions of moral hazard. Now, it could be said, we have "son of moral hazard."

Of course, there are other large banks which the stress tests determined did not need to raise capital. If these banks, including Goldman Sachs (GS), JPMorgan Chase (JPM), State Street (STT), US Bancorp (USB) and Bank of New York Mellon (BK), choose not to sell any troubled assets under the PPIP, there does not appear to be any conflict of interest.

Those most at fault for the overleveraging that caused the credit crisis have not suffered enough pain to have learned necessary lessons to avoid a repeat in the future. Can cranking the lever some more -- this time using public funds -- possibly resolve the crisis? The banks have bankrupted themselves with respect to private capital. Is the next benchmark bankrupting public capital (the taxpayer)?

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