by Tom Bozzo
I don’t know, and am asking. My initial thought is not so much, because the Dodd contingency looks pretty tough (why it’s generally been favorably received in the econoblogiverse) assuming it makes it into a bailout law:
3) VESTING OF SHARES.—If, after the pur-
chase of troubled assets from a financial institution,
the amount the Secretary receives in disposing of
such assets is less than the amount that the Sec-
retary paid for such assets, the contingent shares re-
ceived by the Secretary under paragraph (1) shall
automatically vest to the Secretary on behalf of the
United States Treasury in an amount equal to—
(A) 125 percent of the dollar amount of
the difference between the amount that the Sec-
retary paid for the troubled assets and the dis-
position price of such assets; divided by
(B) the amount of the average share price
of the financial institution from which such as-
sets were purchased during the 14 business
days prior to the date of such purchase.
So when the “G. W. Bush Memorial Fund” sells a Troubled Asset at a loss, the shareholders in the firm that dumped the Troubled Asset pay the Treasury 125% of the loss in equity. In effect, the Fund a la Dodd provides liquidity while privatizing the losses, which is a 180-degree turnaround from the original Treasury proposal. Dodd seems to have brought a BFG to a knife-fight. (Though I wonder if the above section could use a contingency for the case in which 125% of the Troubled Assets’ losses exceeds the equity in the firm.)
In fact, I think the difference in taxpayer exposure with the original Paulson trial balloon can hardly be overstated. In the original plan, the taxpayer’s losses were limited mainly by how rapidly Treasury chose to liquidate securities for which it overpaid and the overall Federal debt limit. Dodd’s modification ostensibly makes the taxpayer’s cost of the bailout the opportunity cost of setting up the fund and providing the liquidity. One might think our foreign funders might be happier to absorb that cost than to fund a huge chunk of socialized losses. Keep that in mind as we hear the Richard Shelbys of the world announce their supposedly principled opposition.
On a somewhat related note, I recommend this post of Mark Kleiman‘s as crystallizing a thought I’d had after reading this one of DeLong’s. When I hear talk of “overpaying” for assets, I ask relative to what — patient money ought to be able to profit from a panicked market (i.e. which will not pay a ‘rational’ price for risk).
Added: Mithras catches that if the Fund’s acquisition of a seller’s Troubled Assets doesn’t stop the seller’s share price from collapsing following the sale, then the Fund can rack up big net losses in the liquidation.
However, as I read the Dodd draft Mithras’s Secnario 3 would trigger the contingent-share vesting penalty. (Thanks to a bit of clarification in the comments, turns out there’s no difference in our readings.)