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.