By Ronald P. O’Hanley and Charles. J. Jacklin
Critics of the government’s financial rescue plan are rightly concerned about taxpayers getting stuck with a $700 billion tab that benefits Wall Street bankers. No plan can be successful if it unduly enriches any of the participants at the expense of the taxpayer.
But does this rescue plan really need to be a ‘bailout’ in order to be successful? Not if it is structured properly and strikes the right balance between protecting taxpayers and encouraging participation by the financial industry. Remember how we got here: an increase in credit risk, a decrease in liquidity, and increased ambiguity of valuation. The Treasury plan will not eliminate credit risk, and taxpayers should not bail out companies that made bad decisions. However, Treasury can increase liquidity by increasing demand and can reduce ambiguity by providing transparency. The best way to do so is to put in place a reverse auction that can help lift the entire market.
Traditional auctions have one seller and many buyers competing on price. But in this situation, there is likely, at least at first, to be only one buyer (the U.S. Treasury) and many potential sellers (all the banks holding these toxic securities). Through such a reverse auction, these sellers would propose to the Treasury – and ultimately any other buyers willing to come into the market as co-investors – the lowest price they would accept for their eligible securities. This will help protect taxpayers from overpaying for these securities. Read more