Zuckerman on an Alternative to the Bailout Plan

In this article from Real Clear Politics, Mort Zuckerman explains that the current economic crisis is largely a result of irresponsible housing and credit transactions from just a couple years ago.

People with no credit score were enabled to buy homes with no money down and to buy ridiculously overpriced homes. How come? Congressmen won votes pressing for "affordable housing" for everyone and community organizers were eager to get on the bandwagon. Congressmen of both parties protected the two biggest mortgage agencies, Freddie Mac and Fannie Mae, from having to find more capital. Everyone assumed houses would go on appreciating way beyond the value of any collateral, so that somehow it would all work out.

Zuckerman continues to say that the current bailout plan doesn't really address the problem fairly. Instead, he proposes an alternative.

The Treasury Department's solution to this crisis had many, many problems. The idea was to buy depressed mortgage securities and other illiquid, even toxic assets. But how to figure out what to pay for assets that are so complex, so uncertain in value, and when many of them remain overvalued on the books of financial institutions?

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But stabilizing the financial markets is imperative. The real issue is who should bear the cost. It should not be the taxpayer.

There's an alternative to buying the bad loans and investments. This would be to invest public funds in these financial institutions through the purchase of prior preferred stock by the government, which would put them senior to all shareholders. Preferred shareholders, namely the public, would be the last to realize losses and the first to receive gains. This would still recapitalize the banking system and give them time to dispose of their bad assets in an orderly fashion.

It's this same approach that Warren Buffett adopted when he invested $5 billion in Goldman Sachs. So why should the public get a worse deal when they are asked to use their dollars to be invested in lesser quality financial institutions, which have a higher risk?

The first description of the plan as a bailout was right; it would bail them out of their mistakes and pay a reward for failure. If there were profits to be made from spending money to shore up the banking system, it should be made by the taxpayers, and not just by the political and financial elites who created this mess.

This is an interesting alternative to the current bailout plan. It would be interesting to see more arguments about how such a plan would play out.