How this Bail-out Has Got to Work

I just heard Bush's speech tonight on the proposed bail-out of the financial sector. He talks a good game, and frankly the speech reminded me a lot of some of the post-9/11 talk. The fact is that this time at least, there is truth in what he says. If you aren't convinced of the need to act, I'd point you to just about anything McBlogger has written lately. I think he's spot on:
"May you live in interesting Times" 9/24/08
"The Fallout" 9/22/08
"While You're All Whining" 9/19/08

But lets talk about how to make this thing work for the taxpayers and perhaps even turn a nice little profit. I'm no Wall Street expert, but I didn't fall off a turnip truck yesterday, and I know that letting one man make secret deals with $700 billion and no strings attached is just asking for graft. With that in mind, and knowing I may get some of the terminology wrong, here's my idea.

1. All deals will be public, and made on the basis of competitive bids held in the opening market.

2. The Treasury Secretary should define a standard "unit" of mortgage-backed securities, including the face value, performing status, collateral value, and default risk.

3. Congress should codify the standard and put some criminal penalties on anyone who intentionally falsifies the rating of one of these "units".

4. Each day until the market begins to recover, Treasury should hold a reverse auction of sorts where they announce that they will buy X number of units of a given rating.

5. Any holder of these mortgage-backed securities, regardless of how large or small, may bid in the open auction to sell up to the daily limit of units, stating the price they're willing to accept for those units.

6. Treasury will accept bids until the bidding stops, choosing the lower-priced bids. The lowest bidder will then sell their bid units at the winning price. If they bid fewer units than Treasury is buying on that day, the next lowest bidder will sell those units at their bid price.

7. After purchase, Treasury will have the package rated and inspected for fraud and material difference in value from the stated specifications on the bid. Findings for each lot will be public. Fraud will be referred to Justice for prosecution.

8. Representatives from the executive and legislative branches will keep a watchful eye on the markets, looking for signs of liquidity in these securities. They will meet each week or more often to provide input on the size of the next week's auction units.

9. When liquidity is restored, whether or not the $700 billion target is reached, the government will then taper off these auctions.

10. The securities will be held until such time as Congress, the Federal Reserve, and the Treasury agree that the market would support their sale. At that time, Treasury would reverse the process, selling a number of these units each day based on market conditions.


I think my plan would work because it combines the best elements of transparent government and free-market pricing. Because there is no means for anyone in government to show favoritism to a given institution, there is no incentive for graft. Pricing will be competitive. Those institutions with the greatest need for cash to move these securities off the books will price them the lowest.

Because the government would be inviting all holders of these securities to bid their sale, you would be making a market for them. If for instance, the market sees that by the third day of these auctions, these securities are selling for 65% of face value, you may have some investors begin to purchase them, knowing they will get at least that much back if they want to sell them.

By limiting the amount purchased each day to some percentage of the total market, and being aggressive in the first days, you show that you mean business, and you get some of the worst debt off the books.

What do you folks think? Is there some other way to ensure the process is open and fairly priced? If there is, I'm all ears. Lets hope your elected representatives are too. BTW, Mike Burgess finally provided a couple of paragraphs as of tonight, showing that he still doesn't understand, or that his calls to the think tanks are not being returned.