Privatizing the bailout

NY Times:

Wall Street helped produce the global financial and economic crisis. Now, as the Obama administration prepares to unveil a revised bailout plan for the banking system, policy makers hope Wall Street can be part of the solution.

Administration officials said the plan, to be announced Tuesday, was likely to depend in part on the willingness of private investors other than banks — like hedge funds, private equity funds and perhaps even insurance companies — to buy the contaminating assets that wiped out the capital of many banks.

The officials say they are counting on the profit motive to create a market for those assets. The government would guarantee a floor value, officials say, as a way to overcome investors’ reluctance to buy them.

Details of the new plan, which were still being worked out during the weekend, are sketchy. And they are likely to remain so even after Treasury Secretary Timothy F. Geithner announces the plan on Tuesday. But the aim is to reduce the need for immediate federal financing and relieve fears that taxpayers will pay excessive prices if the government takes over risky securities. The banks created those securities when credit and home prices were booming a few years ago.

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This is creative, but for it to work, the debt needs to be sold to non regulated investors who don't have to carry the assets on a balance sheet that effects their ability to operate. I am not sure how many of those are out there. Perhaps the government floor will be high enough that the assets become bankable, but that is risk the government is taking.

That floor raises an interesting question. How many of these assets contain securities that already have a government guarantee? If that were the case, the risk to the government would not be as great.