Why Fair Market Values Should Drive Revised Bailout Plan

(MoneyWatch)  The shocking (at least to some of us) thumbs-down by Congress to the financial buyout program now brings us to Plan 2: improving Plan 1.

A number of financial thinkers and economists agree with the House majority that the first plan had a major fault -- taxpayers assumed all of the risk while firms receiving help contributed little to the package. It seems certain that in the days to come this will be a central area of focus by lawmakers.

Lucian Bebchuk, a professor of economics, finance, and law at Harvard Law School, last week released his own critique of the bailout package and an alternative plan to spread the risk around. If you want to get a taste for the negotiations to come in Washington D.C. this week, purchase his white paper titled A Plan for Addressing the Financial Crisis, or see a summary he wrote for the Wall Street Journal. Bebchuk proposes:

1. Prevent the overpaying for assets by requiring that the Treasury pay fair market prices. "If troubled assets are purchased at fair market value," he says, "taxpayers might get an adequate return on their investment."
2. Address the undercapitalization of financial firms by allowing the Treasury to purchase, again at fair market value, new securities issued by institutions in need of capital. "Simply buying existing distressed assets won't necessarily channel the capital where it needs to go. Allowing the infusion of capital directly for consideration in new securities can do so."
3. To ensure fair market value prices, Treasury purchases should be made through multi-buyer competitive processes with appropriate incentives.

Bebchuk argues that his plan, grounded in fair market values, better protects taxpayers while restoring financial stability. What's your bailout plan look like?

Related Reading: Harvard Business School Faculty Look at Causes and Consequences of the Financial Crisis (HBS Working Knowledge)

(Stock market bear by azrainman, CC 2.0)

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This post first appeared in BNET's The View From Harvard Business.