Mark Cuban’s Idea On a Private Bailout of the Financial Sector

Mark Cuban has an idea: Let’s scrap this government bailout of the financial sector and instead make it private. Create an Exchange Traded Fund (ETF) that buys the distressed securities these companies want to get rid of, as well as all warrants and shares of stock in the companies themselves. Investors choose whether or not to put their money into the fund and Mark is  offering up $50 million of his own funds to invest in such a plan.

This fund would then be traded on the open market like any other fund. If the purchased assets do well, the share price of the fund goes up, and vice versa.

If enough capital couldn’t be raised in the immediate future from private investors, the U.S. Treasury makes up the difference. (They’re already planning on ponying up money anyway, so this just means they’d pony up less.) If the fund is successful, dividends would be paid and the U.S. Treasury would receive their proportionate share of the dividends.

As our economy improves, institutional shareholders could keep their shares or opt to trade those shares for the assets of the fund. (i.e. If they felt the fund was poorly managed, they could trade out for some of the loans owned by the fund and manage those loans themselves.)

This idea makes sense on so many levels:

  • It removes responsibility from unwilling taxpayers. I don’t know anyone who thinks that a taxpayer-funded bailout costing anywhere from $2,000 to $3,000 for every man, woman, and child in the United States is a good idea. I don’t want our economy to “fail,” but I also don’t want to pay the tab for companies that ran bad businesses and gave millions to their executives. They reaped the benefit of obscene profits, and now I am supposed to pay the toll for all the loses.
  • It offers an upside for those who participate. The taxpayer-funded plan theoretically allows for an upside to be realized by our government. But what will be done with those profits? It surely won’t be returned to the taxpayers who funded the bailout. You better believe that no matter who becomes our next president, they’ll find plenty of ways to spend that money and not return it to its rightful owners. A privately-funded bailout ensures that those who take the risk and participate are able to reap the benefits of an upside. That’s fair.
  • It lets the market work. Bad business decisions will have a cost, and the market will decide what that cost is. There will be no blank check from the government to these financial firms. The private sector will offer a bailout to the financial firms, which means that they will get market prices for their securities. You can bet that any government bail-out will buy the bad securities at more than they’re worth. After all, what good is a government bailout if we can’t get extra money?
  • It sets a much better precedent. If Uncle Sam comes to the rescue, it’s too easy for financial firms to continue making the same mistake, knowing the government will bail them out. A private bailout is not so certain, and not without a higher price. Companies will know that their survival is not guaranteed, and the price will eventually be paid for horrible business practices.

I’d actually consider investing in a fund like this, and I suspect there might be plenty of other consumers who would too. It would give us an opportunity to help fix the financial mess on our own terms. We would decide how much to put in, we’d share in the upside, and we’d be able to get out when we choose (subject to market prices, of course).

See this post in this week’s Carnival of Personal Finance.

9 Comments

  1. Much of the time Mark Cuban straddles the line between genius and entertaining maniac, god bless him.

    Sadly, his suggestion is far too sensible for the wonks and econotards in Washington to actually consider it.

  2. I believe that Mark Cuban’s initiative is the only reasonable alternative left to us. There is a moral issue underlying the entire fiscal 911 situation. There is an old expression that says “You don’t cut off your nose to spite your face.” This is the exact kind of mistake that precipitated the crisis in the first place; I will explain.

    The management failures of these executives is a blunder of incredible proportions. Chief, blunder was the belief that if the people defaulting on their loans could be replaced by an entire group of other borrowers. The bankers set the borrowers out into the rental/homeless market which raised the Supply side of the market, lowering housing prices. I remind you of the supply/demand aspects of economics. These bankers then through a bungle of phenomenal proportions left their assets without a caretaker.

    Frustrated with faceless bankers, borrowers, the care takers of the real estate, having a keen interest in it, were set on the curb. Some out of frustration left these assets by punching holes in the walls, destroying the heating systems and the like. Although this may have been a relatively small amount of destroyed properties, the remainder of properties were left empty and targets of vandalism, arson and criminal recyclers. In retrospect, the executives should have renegotiated terms with the borrowers. They then would have continued to receive repayment of the loans and protected their assets. Instead, of taking the more reasonable route, out of greed, they allowed–through their malfeasance and greed to put these caretakers of their asset into the rental market (or back on family and friends) and exposed their assets (real estate) to the aforementioned degradation of abandonment. For sale signs went up all over America which drove the price down so the bankers failed to reap the benefits of reselling even where the properties did not fall into the hands of squatters and vandalism.

    The executives, drawing unimaginable salaries in the millions, can only be described as HEARTLESS in their actions, bringing about the nose dive in market prices and allowed their assets to be destroyed. Now they are reaping the whirlwind of their own greed, karma of sorts. They kicked the cards out of their own “pyramid scheme” of greed. They brought their own house of cards down. Rewind, had they renegotiated the loans creating terms that would have allowed the borrowers to stay in their homes, then (1) The supply side of the market would have remained steady (2) the assets would have remained intact (3) the loans would be repaid, albeit at a reduced profit.

    Buyers of the instruments, sold upward in the pyramid of greed which allowed the loaners to reap an immediate profit, placed a bet on the paper which was over valued, making what should have been a sure thing an incredible gamble in hind sight. Their own greed and HEARTLESSNESS toward the borrowers in favor of the writers of these instruments, brought about all the collapse. Now to put more money into the hands of these HEARTLESS executives in what I can only describe as the largest EXTORTION in the history of mankind.

    Citizens (to include the unborn) are being told (not asked) that we must bail out the Titanic. The credit rating of these failing firms has gone into the tank. The shoe is on the other foot. Those defaulting on their loans face never, never, never being able to enjoy the American Dream of owning their own home. The bankers put a huge F on their report cards. In the process they have ruined their own credit. WE THE PEOPLE can not just GIVE a blank check to these executives (who have already taken their huge salaries/profits). We must look at their credit rating now and determine if an investiment in their affairs is wise. The same set of circumstances under which they operate in regards to their borrowers. Isn’t HEARTLESSNESS really called for here? If forgiveness should apply to Main Street, shouldn’t forgiveness apply to all borrowers who are similarly situated.

    While these bankers have made people live with their credit rating in a unforgiving manner, these folks now must live with their own bad credit just as these folk expect us to do. Reference the commercial showing the fellows serving chowder in a pirate’s bistro, or the same characters driving off the lot in the sub compact car that gets laughed at by jet setting Paris Hilton types.

    As with any real world citizen who has gone bankrupt, might a lengthy waiting period apply? Okay, lets waive the waiting period, but make this “bail out” a loan to be managed and overseen by regulators rather than another big government give away! Might the regulators actually side with the consumer and have his interest at heart rather than having the interests of the bankers at heart as has been the bad state of affairs.

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  4. Steve Close

    I had come up with a similar solution on 9-21-2009/21/08
    Editor
    It’s possible the government will be buying 700 billion worth of bad debt secured by assets worth far more than 700B. If the face value of those mortgages is up to 3 times the cost of the 700B bailout as suggested by an oft quoted 30 cents on the dollar purchase price, this could be a fire sale bargain. Why not offer investors an opportunity to buy shares at X$/share up to the 700B? As the assets are sold off, investors would be returned their initial investment plus any mark up which could be considerable. As with any investment, there could be loss of investor capital up to the entire amount of investment, but taxpayers would be off the hook if all the Fed outlay were bought up by investors. Once the mortgage bailout bundle is inventoried and valued, why not give investors a chance to take it off the government’s hands? 50 million investors averaging $14,000 apiece (1400 [email protected] IPO of $10/share) each would = 700B.
    Of course the same model could be applied to all the other recent Wall Street bailouts.
    If my plan is adopted, all I’m asking is a 1% fee to be shared equally between me and my team of facilitators (crony capitalists?): Bernake, Paulson, Bush, Reid, Pelosi, Clinton, Obama and McCain. A trifling $77,777.777.77 apiece. That looks like a lot of lucky numbers ;)))
    Steve Close

    8:

  5. Charles Farley

    As a free-market maven, I think it is a great idea. But consider this, as the ETF moved to liquidate hard assets into cash to pay dividends or buy back stock etc… people will get thrown to the streets as they will, and rightfully so, foreclose on the better properties and resell them. The politicos would never let that happen.

    I would…

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