Legal Commentary

Thanks to all of the Prawfs for having me this month -  I look forward to posting on a variety of topics, including some upcoming patent law issues.  But first, like Chad Oldfather, I am going to start with something I hadn't planned to talk about: the bailout (how did you ever guess?).  This will be my first and last post on this topic - I will leave the serious discussion to others.

The WVU College of Law hosted a panel yesterday on the financial crisis, including discussion of economic reasons for the crisis, regulatory reasons for the crisis, and discussion about how we should think about the legislative and implementation process of the bailout.  This is a bit outside my normal area, but I enjoyed giving my part of the presentation and learned a lot from the others.  For those interested, a webcast is here.

I want to post one particular thought I shared yesterday for comment, accolades, ridicule, etc.  My theory is that, if we are to have a bailout (a normatively big if), then the U.S.  should not be paying "fair market" value but instead should pay a premium to buy the toxic assets.  My thinking is after the jump.

• How much the government pays to buy the ?toxic? securities will affect how much burden taxpayers ultimately bear.  Right now, the plan gives significant discretion to the Secretary of the Treasury.  If the government pays too much, then the securities might only be sold at a loss if the values do not increase in the long run.  Even so, the future ability to sell at all means that taxpayers will not pay the full price ? let?s say the government buys $700B worth and can only sell the securities for half as much in two to three years ? the total cost would be $350B (plus interest).
• Of course, it would be better to pay $350B to start. There is a risk to paying too little, though.  If the current holders receive too little, the securities might as well be worthless because either companies won't want to sell, or the companies won't get the new capital they need to survive.
• Indeed, that is the real problem with asking for ?market? prices. I am sure there is some buyer somewhere willing to pay something for these securities with a long term investment in mind (I bid one dollar) ? companies are likely just unwilling to sell for that low a price. It?s the same reason that houses sit on the market for months and months; there is surely someone who will buy the house, but not at the price the seller is willing to accept. 
• Thus, there is no need for the government to step in, unless the amount paid is more than what a true market price would be in order to effectuate a quicker sale.  If there were an auction for the true market price, then the government need not be involved - some private investor, somewhere, must be able to assess the long term value of these assets and buy accordingly.
• Further, from a contract consideration point of view, to the extent that we care about such things, we would want the U.S. to pay a premium for these securities so that it can then demand "in good faith" some aggressive ownership in the bailed out companies, as others have argued. After all, if the government is paying fair market value, then what moral standing does it have to request anything - executive pay cuts included - beyond the securities it is buying?

That's my take from the cheap seats.  I'd love to hear from anyone who thinks I'm wrong, and I'd love even more to hear from anyone who thinks I'm right.