Treasury Mulls Cash for Bank Stock

Cash for stock. Straight up. That's what Treasury is considering now. It's simpler, to be sure, and would take us out of the business of pricing, owning, managing, and reselling all those junk securities, and the additional cost, I might add. I believe it was my own RI Sen. Jack Reed who pressed for getting stock warrants with any purhcase of distressed mortgage-backed securities--although it was not clear to me just how that would work or how the two elements would tie together from a value/pricing perspective. But I don't remember hearing about unequivocal authority to simply, directly infuse capital into financial institutions for equity shares. Perhaps they just reasonably infer that authority as a functionally equivalent alternative way of putting money into the system: just take back the equity shares, but leave the junk securities behind.

I've read references to research indicating a history of success with such an approach in a lot of cases in smaller economies, many academic economists also now back it, and Britain announced such an approach yesterday. So I am actually relieved that we may take this simpler, more streamlined approach, and not get mired in valuing, managing and reselling all those distressed securities--at least in appropriate cases. They would have to be confident that the chosen institutions will survive or else the equity shares can become worthless, and the taxpayers would have been better served by owning the distressed securities that in the aggregate will likely be worth near what we pay for them. And I assume that as soon as the banks are healthy again--and our equity shares show a nice profit--the Treasury (we) will get out of the business of owning financial institutions, and into the business of better regulating them.

We're doing a lot of things right: increasing FDIC insurance, buying corporate commercial paper where necessary, and leading a coordinated international interest rate reduction. And while I really like Bernanke's and Paulson's current emphasis about getting it right, as well as getting it done as fast as practicable, I'll feel better when we actually get some significant infusions of cash into the financial system.

http://www.msnbc.msn.com/id/27094961/