The Fall of the Toxic-Assets Plan

From The Wall Street Journal: The plan for buying troubled assets — which was earlier announced as the central element of the administration’s financial stability plan — has been recently curtailed drastically. The Treasury and the FDIC have attributed this development to banks’ new ability to raise capital through stock sales without having to sell […]

Toxic Tests

From Project Syndicate: CAMBRIDGE – The United States government is now permitting ten of America’s biggest banks to repay about $70 billion of the capital injected into them last fall. This decision followed the banks having passed the so-called “stress tests” of their financial viability, which the US Treasury demanded, and the success of some […]

Equity Compensation for Long-Term Results

From The Wall Street Journal: By Lucian Bebchuk and Jesse Fried Treasury Secretary Timothy Geithner announced on Wednesday the Obama administration’s strong belief in tying executive compensation to long-term company performance. The regulations issued that day direct the new “compensation czar” to ensure that financial firms receiving “exceptional assistance” from the government don’t “reward employees […]

The SEC’s Proxy Access Proposal

From The Wall Street Journal: The Securities and Exchange Commission voted last week to ask the public to comment on a proposal to let shareholders place director candidates on the corporate ballot. The adoption of such a rule would be a useful step toward the necessary reform of corporate elections. As my research has shown, […]

Near-Sighted Stress Tests

From Forbes: Buoyed by the results of the “stress tests” conducted by banks’ supervisors, markets now appear optimistic about the capital positions of U.S. banks. Unfortunately, however, this renewed optimism has a shaky foundation. By design, the stress tests have avoided estimating the declines in the value of many toxic assets owned by banks. As […]

The PPIP: keep banks out

From the Financial Times; Should banks with large amounts of troubled assets be allowed to participate as managers or investors in funds set up under the US’s public-private investment programme? The way the scheme is currently designed not only permits such banks to take part, but encourages them to do so. Media reports indicate that […]

How to Avoid Overpaying for Toxic Assets

Opponents of the administration’s current plan for buying troubled assets — including Joseph Stiglitz, Jeffrey Sachs and Peyton Young — strongly criticize it for providing private parties with highly skewed incentives to overpay for such assets at taxpayers’ expense. This problem, however, isn’t fatal. It can be fixed, and fixing it would do a great deal both to increase the plan’s benefits and reduce its costs.

Under the plan’s current design, the private side — the manager and the private investors affiliated with it — will contribute as little as 8% of the capital of funds set under the program, with the rest funded by the Treasury and Fed. In return for this 8% of capital, the private side will get 50% of the upside but bear half of the downside only up to 16% of the fund’s capital. Such asymmetric payoffs would provide powerful incentives to seek assets with volatile value and overpay for them.

A Fix for Geithner’s Plan

With the world’s attention shifting to London and the upcoming Group of 20 summit, it’s possible that the Treasury’s proposal for dealing with banks’ “troubled assets” will become old news. It shouldn’t. The administration plans to provide as much as $1 trillion to privately managed funds that will buy troubled assets, which is indeed the […]

Jump-starting the Market for Troubled Assets

Four weeks ago, Treasury Secretary Geithner announced the administration’s interest in developing a plan—which the Treasury is willing to back with up to $1 trillion of public funds—to partner with private capital to buy banks’ “troubled assets.” The announcement has met with substantial skepticism about the possibility of working out an effective plan to restart the market for troubled assets for such a public-private partnership. However, in a white paper issued last month, How to Make TARP II Work, I show that this can be done, and explain how the plan should be designed to contribute most to restarting the market for troubled assets at the least cost to taxpayers.