It seems no one is discussing what the bailout package is attempting to do. The public is getting the idea that the shareholders and executives of the companies involved are going to get a free lunch with this program and will feel not much pain. I think it is important to address this issue and I feel the candidate or party that does correctly and first will reap substantial benefits. In regard to the bailout (which is wrongly titled), if significant funds are not made available shortly, there is likely to be a panic in the financial markets.

The old method of allowing companies to file for bankruptcy and then having all the bond, and other creditor issues resolved through the bankruptcy process and the FDIC process is not an alternative as the problem is so big and the financial interrelationships between financial institutions so complicated that this process just won't work. The credit markets around the world are telling the story. If big institutions won't lend to each other, what happens when the public is infected with the same fears? There will be a run on the banks and the money market funds.

In regard to the bailout, who is going to benefit, the shareholders of financial institutions that currently haven't failed, the bondholders, and other creditors?  These other creditors are the money market funds, the CD holders, and the bank depositors. The current stock holders of financial institutions have currently lost on average over 60% of the value of their equity. The equity holders of the financial institutions that have the biggest exposure to this problem have lost 90 -100% in the value of their stock. Will the bailout make these holders almost whole? I don't think so but I believe the public believes this to be the case. I don't think the public would consider money market funds and CD holders culpable for the mortgage mess. Yet, these entities will bear the brunt of a meltdown in the market by losing probably 60% -90% of their investment. Since depositors are covered by FDIC, the government would have to cover these losses.

So, while the bailout is perceived mainly to help the shareholders and top executives, in reality it mainly helps Main Street. If you look on the balance sheets of financial institutions, you will see that the debt holders percentage of total assets is in excess of 10 times that of equity holders. After the current losses at financial institutions, this number is likely to be over 100 times. So, how is the bailout a bailout of Wall Street and not a bailout for Main Street? If the public is worried about shareholders benefiting 1% vs. them benefiting 100%, this issue can be also addressed. The government could setup  the bailout as a vulture fund. If a financial institution needs a capital infusion and asks for one, the government can give them one and in turn receive convertible preferred stock based on a valuation currently given the equity in the stockmarket today. If a financial instution's equity was valued at $1B and they needed a $50B loan then shareholders would be diluted approximately 98%.

As a preferred investment, bond holders and the other creditors who were not instrumental in the poor decisions that created this problem would be protected. The bailout fund's actual investments would be determined by the market's need for funds. Instead of the government owning distressed assets, the financial institutions would still own and manage them. As the major shareholder, the government would have a say in how these assets were managed and what individuals managed them. This type of plan would alleviate any new government agency bureaucracy while stabilizing the financial markets by massively reducing the risk and interparty risk of all creditors.

 

I don't know what plans are being proposed in Congress but from what I'm hearing they are lacking.