Who cares where the assets are carried on a firm’s books? If Morgan Stanley has them at $.30, Merrill at $.32 and Goldman at $.50, this is not the point and should play no part in the analysis.
There should be a reverse auction to determine price, with the Treasury buying the cheapest and moving up the line. Depending on where firms are carrying these assets, it might require a write-down that would threaten its solvency. If not, great. The firm has liquified the assets and the U.S. taxpayer gets the upside over time (monetizing the liquidity option, in my parlance).
However, if there is a capital gap I’d suggest that the Treasury gets issued convertible preferred stock on attractive terms, supporting the firm in its operations while substantially diluting common equity holders.
In this case jobs are saved, the institution continues to operate as a smaller, leaner, hopefully more prudent firm while the U.S. taxpayer, once again, owns the liquidity option.
Information Arbitrage: Paying for the Bailout: In Defense of the U.S. Taxpayer
This is one of the most genius financial analyses+creative ideas I’ve ever read…recommended!
