Diary

How to Fix the Financial Companies’ Fiasco Without a Bailout

The government should loan the money to the financially troubled companies as preferred debt rather than buying any assets from them. (Preferred debt means that the principal and interest takes priority over all the company’s other debt and equity obligations.)

The interest on the preferred debt should equal the T-bill rate plus 5% (adjusted daily).

All of the borrowers’ net profits (after any taxes are paid) must first go to pay preferred interest and principal to the U.S. government before any dividends are paid to any of the company’s equity holders.

As the preferred lender, the U.S. government (or its designated agents) have full access to the borrower’s accounting records and any documentation related to their assets.

Any borrower not willing to agree to these generous terms should be allowed to fail.

This approach forces these companies to solve their own problems rather than pawning off their bad assets to the American taxpayer. Those who created those problems, and who have the most to lose, must be forced to clean up their own problems. If these people can’t fix their problems, then certainly federal employees would not be able to.