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.