Improving the Wall Street Bailout Proposal

Last Updated Sep 30, 2008 9:53 AM EDT

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.

Improving the Wall Street Bailout ProposalA number of financial thinkers and economists agree with the House majority that the first plan had a major fault: namely that 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.

He 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)

  • Sean Silverthorne

    Sean Silverthorne is the editor of HBS Working Knowledge, which provides a first look at the research and ideas of Harvard Business School faculty. Working Knowledge, which won a Webby award in 2007, currently records 4 million unique visitors a year. He has been with HBS since 2001.

    Silverthorne has 28 years experience in print and online journalism. Before arriving at HBS, he was a senior editor at CNET and executive editor of ZDNET News. While at At Ziff-Davis, Silverthorne also worked on the daily technology TV show The Site, and was a senior editor at PC Week Inside, which chronicled the business of the technology industry. He has held several reporting and editing roles on a variety of newspapers, and was Investor Business Daily's first journalist based in Silicon Valley.