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Bailout Talks Lose Sight of the Cost Question

How to get the right price for the assets: We should do a variant of what the Swedes did: Offer to take a preferred equity position in any institution that requires additional capital in order to realize losses on mortgage-based assets..

The institution must use the capital to make a write-down of the specific impaired assets, and can then dispose of the assets to private investors on the open market, or hold them, a they see fit.

The price of preferred shares should be determined by some function of the market value on AND around the date of asset disposal (and/or writedown), details TBD. Of course, safeguards against price manipulations around those dates must also be enacted.

The key is to align tax-payer interest as a stakeholder with the regular shareholder interest, and the management interest. That is the only way to get the desired outcome, which is to protect the taxpayer downside and to participate in the upside. In short, the bailout should take the form of an INVESTMENT for a RETURN.

Note: I’m not talking about the type of “aligning management and shareholder interest” which is doublespeak for “handing out lot of options and restricted stock to management”. :-)