Bookstaber Looks for a Government Bailout

Rick Bookstaber thinks that bailouts – some bailouts, anyway –

can be a

jolly good idea. If Citadel can bail out troubled companies and make money

at it, why can’t the government do so as well?

To be specific, 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.

One precedent which springs to mind came in August 1998, when the Hong Kong

government spent $15 billion buying up stocks in an ultimately successful attempt

to support the Hang Seng index.

When I was in England, an individual investor asked me where and how he could

buy some of these illiquid debt products which are reportedly trading at 35

cents on the dollar or so – a very attractive price for a buy-and-hold

investor who doesn’t mark to market. I said that I had no idea: the financial

markets have been steaming full speed ahead for many years and have basically

left retail investors behind. This is a good thing in that retail stock-heavy

investors really haven’t suffered from the present crisis, but it’s a bad thing

in that all that retail money is essentially unavailable for bailout purposes.

The government, of course, is not a retail investor, and could if it wanted

step in and buy up illiquid debt by the bucketload. I just can’t see it happening

in practice, though: the politics of deciding what to buy and what not to buy

would be so fraught that economic considerations would rapidly go out the window.

While I’m at it, here’s a Special Bonus Link for you: A

great review of Bookstaber’s book.

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