Federal Bailout

Posted on 09/19/2008 | 2 Comments

(Community Matters) Ideas floating about an RTC-style entity to purchase distressed securities from ailing financial institutions. We’re potentially talking trillions. And, we’re talking hundreds of billions in shareholder wealth. We should also be talking about warrants from every private institution that we help rescue through these transactions. I’m talking a special type of warrant created to capture every bit of the increase in shareholder value as a result of the bailout, not just the immediate increase in value but the majority of value for a determined time in the future too in order to appropriately reward the American public for its largesse. I’m imagining an instrument which would capture the increase of, say, 80% of all increased market value for, say, 5 years. Obviously, financial institutions wouldn’t have to avail themselves of the securities put option. And, admittedly, the cost of doing so would be extraordinary. It should be. If there are private options, management absolutely should pursue them rather than government funding.

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2 responses to “Federal Bailout”

  1. Unknown's avatar PM | 09/19/2008 at 7:57 PM | Reply

    This is a time for cool reasoning and the long term view from our elected officials and regulators, not emotional response and panic.We must create liquidity while respecting moral hazard.The only way a bailout as imagined here can work — and not cause far greater harm and a repeat of this same scenario in the long term — is to structure something that respects moral hazard. Bad loans the government takes over should be tracked and any losses incurred should be transferred back to the institutions responsible for them in the form of taxes on future profits and/or penalties.Otherwise we are rewarding and encouraging the behavior that led up to this. Our nation deserves better than Ponzi Scheme Economics. Real changes are required to our economic system to get on track for sustainable and robust long-term economic growth — this crisis is a rare opportunity and catalyst — we must not sacrifice it in the name of panic and short term relief.

  2. Unknown's avatar stephen walls | 09/19/2008 at 11:59 PM | Reply

    Good post and great response. My concern continues to be the release of obligation that these packages and entities provide to the very people and organizations who designed, participated, and facilitated the instruments and policies that created the current mess. We can not continue to reward those who ignore risk rather than those who manage it effectively. On a political note – this is something that both camps could gain traction on as it speaks to concerns of those on the proverbial main street.

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