Bankruptcy

The Bailout -- another persepctive (part 3)

By Stephen Lubben

What is the purpose of the bailout fund?  Even the proponents don't agree on this.

It seems clear from Paulson's initial proposal, and Bernake's testimony yesterday, that they see the fund as a fix for a market that has "gone irrational." The fund is thus a solution to market failure.  Seen in this light, the fund is a kind of subsidy to the financial industry -- the size of the subsidy depending on whether the current market or Paulson/Bernake are right about the true value of these assets.

But yesterday I proposed viewing the bailout fund as a moment to put the issue behind us -- a collective act of putting cards on the table.  Not only is this approach seemingly more politically viable, but it should reduce the risk to the treasury, since the government either forces the banks to take a "haircut" upfront or recoups on the back end through an equity stake -- or some combination of the two.  Here the bailout fund serves to guarantee that we have hit a true bottom in the market, since the banks part with the assets once and for all.

Clearly the theory behind the bailout fund is important and needs to be resolved.  Otherwise Paulson/Bernake and Congress will continue to talk past each other.

Full post as published by Credit Slips on September 24, 2008 (boomark / email).