The Treasury bailout and equity ownership

Matthew Yglesias and Paul Krugman both suggest that taxpayers should get "a stake in the upside" (Krugman's words) in return for bailing out the financial industry. But that's unlikely to happen due to conservatives' deep-seated hostility to government ownership of private industry. During the debate over Social Security privatization, many people pointed out that we could capture the upside of private equity investment (high returns) without the downside of individual accounts (high management costs, poor investing decisions) if the government simply invested Social Security funds in the market. But conservatives (including Alan Greenspan) killed this idea, warning of the dangers of government interference in private markets. Obviously the dire situation on Wall Street has changed the terms of the debate, making it possible for the government to buy almost 80% of AIG without protest, but it's still not clear that the Bush administration would want the government taking equity stakes in all the companies it bails out.

Comments

[lowellfield]

I don't think people are arguing the Bush administration would want it as much as they're arguing it's a good idea. Or at least a better idea than just having the government buy the debt instruments that no one will pay anything for now but maybe someday will fetch real money.

[Howard Craft]

Krugman has a good point.

The banks and investment firms need equity investments. Owning equity is generally a passive activity - it wouldn't involve any Government management or oversight. The bad investments and related debt could stay with the firms and get resolved in an orderly manner.

If financial institutions weren't under capitalized (didn't need additional equity) they wouldn't need to be distressed sellers.

The investment community (stockholders) can act, in many regards, as the best oversight authority. The objectives of the employees, the management and the owners (which would include the Federal Government, to some degree) would be aligned.

A risk of an RTC type authority isn't just that there is no "upside" - it's that the RTC becomes the distressed seller. The role of the distressed seller is transferred from the private sector to the public sector.

Even if the agency can better "wait out the market turmoil" they are hindered by being poorer marketers and evaluators of the assets they will manage.