Saturday, 20 October 2007

Keep bailing

Rich Bookstaber has a proposal:
[...] what if the government maintained a pool of capital on the ready to buy up assets of firms that are failing, much as Citadel did for Amaranth and Sowood? Of course, if a private entity is willing to step up to the plate, all the better. But as a last resort, what if the government took on the role that Citadel did in these instances. There would be no moral hazard problems, since the firm still fails. But the collateral damage would be contained; the market would be kept from going into crisis, the dominos would be kept from falling. And the taxpayer would have good odds of pocketing some profits.
That is all very well if the failing firm's assets were really purchased at a market clearing level. But determining that level is very difficult, and the value of a portfolio in a distressed firm (as doubtless Citadel knew) is rather lower than in a going concern. There would be enormous pressure on such a government fund to overbid giving a better outcome for the firm's shareholders but a worse one for the taxpayer. Also where is the government going to find the right kind of people to run its vulture fund? Great hedge fund traders tend not to be the type who want to be government employees. It's a superficially attractive idea but I suspect it isn't very practical. Mind you, the current asset dry dock MLEC doesn't look that practical either...

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