Should Paulson’s Fund Welcome Outside Investors?

Here’s an idea I probably haven’t thought through properly, but shouldn’t outside investors be not only allowed but welcome in the new fund being set up by Hank Paulson? The fund is, after all, a distressed-debt fund at heart, and there are a lot of investors who would love to take this opportunity to buy up distressed assets on the cheap — especially if they could piggyback on the negotiating leverage that Treasury will have.

At the same time, every dollar invested in the fund by an outside investor is a dollar which taxpayers don’t need to come up with themselves, and is one less dollar added to the national debt.

I’m not even sure you would need particularly long lock-up times for investors. After all, the fund will surely have some kind of quarterly mark of what its assets are worth. Investors would be able to put money in or take money out each quarter, at whatever that mark is — while paying maybe a 1% annual management fee. If in any quarter investors withdraw more money than they invest, Treasury would then make up the difference — but at least it would have gone all that time in the interim without having to borrow the money.

Another way of achieving much the same end would be to sell equity in the fund: set it up as a company, majority-owned by the government, but with a small public minority float with an IPO at say $100 a share. The share price would then be a very good day-to-day indication, if you believe in the wisdom of crowds, of how the bailout fund is doing and whether the government is making a profit on it. And of course the fund could raise new equity any time it liked, as an alternative to funding itself entirely on the debt markets and thereby placing an extra burden on the public fisc.

Fannie Mae and Freddie Mac are already in a very similar state; AIG soon will be. Why not get to a similar place with the bailout fund, only instead of nationalizing a private company, privatize some of a public company? Maybe Hank Paulson himself should be encouraged to buy say $10 million of shares for his personal account, to get the ball rolling.

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