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At what cost?

It's hard to avoid talking about the big proposed government bailout of the financial markets.  As Fred wrote, we need some liquidity in the system where private companies don't feel comfortable providing that to each other.  Having a credit gridlock stall the economy isn't in anyone's interest.

But, if the government is going to be the investor of last resort, then the government (us) should get the lion's share of the upside.  The AIG deal seems like a good blueprint -- an $85B loan at a higher than market interest rate, secured by $1 trillion in assets with an 80% equity stake in the company to capture the upside.  This could turn out to be a pretty good deal for the taxpayers, who could make a profit.  In fact, this is probably a good buyer's market for private equity investors with the guts (Warren Buffett investing in Goldman Sachs) or the deep pockets (us, again) to invest now when others won't.

To me, the big challenge is figuring out what these assets are worth.  If the government is going to take bad loans and other investments off the balance sheets of financial institutions in order to shore them up, then the government needs to get a great deal on the value of those assets.  We're talking cents on the dollar.  This may cause the financial institutions to do some further write downs, but will at least let them signal the markets that this write down is the last one.  And, it will give the taxpayers some upside potential.  I don't know who is going to decide what these assets are worth, but it has to be a VERY conservative estimate.  Maybe this is a good job for Mitt Romney?

If you've ever been at a company that has gone through a recap investment round, you know that the terms can get pretty draconian.  That's what we need to enforce on Wall Street.  That's their punishment for getting in way over their heads and toppling the house of cards.


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