Mark Cuban's New TARP ETF Idea

It’s not “Dancing With the Stars” by any means, but Mark Cuban took a few minutes to answer some questions we had about his idea for an ETF.

We first heard him discuss his idea on NPR’s Planet Money podcast. The deal would be that instead of the government handing out money to banks or buying their bad assets or stocks - why not bundle those assets into an ETF and let the markets decide how they’re priced?

We think it’s an interesting idea. In fact, Cuban has taken a keen interest in the market mess, devoting  Blog Maverick to the subject, as well as starting Bailout Sleuth in order to keep track of taxpayer dollars and maintain transparency. Awesome.

How would you structure this ETF? What would it be composed of?

Whatever assets that the TARP [Troubled Asset Relief Program] would buy.

How do you think it would solve the problem of the crisis?

It would create transparency. It would set true market values for the assets. It would allow government money to be replaced with investor money as shares of the ETF were purchased on the open market. It would allow for an orderly liquidation as shares of the ETF could be traded for the hard assets.

Where did you get the idea?

Just happened to think of it.

If such an ETF were constructed well and priced fairly, would you invest in it?

Of course. It would help the economy. It would improve the liquidity of the ETF. Most importantly, it would create a value for the assets to get the ball rolling.

As far as ETFs in general go, many believe that after the markets rebound, investors will be looking for more transparent products like these. What’s your take on this, and will you be one of those investors, too, if you aren’t already?

Actually, I think it’s the other way around. The more uncertainty, the more transparent assets are in need. One of the problems with hedge funds in particular and many mutual funds, is that they are not liquid. In fact, many limit when you can get out. Which is going to make funds far less attractive. Well-designed ETFs can be a valid alternative for consumers.

Comments

[jswede:]

let ETF investors decide how "bundles" of CDO / sub-prime RMBS are priced...??????????

these pieces are as different as night and day... letting the folks who own this stuff (and have studied the collateral) throw them together into a pool to sell to unsophisticated investors who wouldn't know how to value the collateral even if they had the capability (which they do not) is ridiculous.

and no, sophisticated investors would NOT buy a pool of different bonds at one price... they would buy tranches individually, after days of research, to pick the good from the bad.... there is paper worth 5 cents and paper worth 85 cents in sub-prime land.... and it's all "troubled assets" to DC and Main Street... as though it has the same value...

you would be selling to retail -- and retail doesn't know the first thing about this paper -- and as such, would be the huge loser of the trade down the line..

2008 Oct 30 10:05 AM

[ETFnerd:]

I disagree with jswede. I think that if you put the terms of the assets out there in a completely transparent setting, you could have much better price discovery. People with superior knowledge would bid strongly, and those with limited expertise would require a higher margin of error.

You could also hide the name of the offeror so that a stigma does not attach to the seller.

The problem is not in price discovery. The problem is that if all these assets were priced by the market and they cleared at market prices, thousands of financial intitutions would be insolvent. The bailout is a mechanism for inflating toxic asset prices. That's why it's a bailout. The inflated price provides relief from immediate insolvency.

The solvency issues of many financial firms have not been resolved, and this proposal does not provide a feasible solution.

2008 Oct 30 05:23 PM