Monday, October 13, 2008

How the Bailout Auction Should Work

How much should the Treasury pay for distressed assets that nobody else wants?

You might reasonably say that the fair price for an asset nobody wants is zero. But bailout proponents tell us that these assets are plenty valuable; it's just that nobody's stepping up to buy them because it's hard to borrow right now. So how do you set a fair price for an asset that nobody else is bidding on?

Rochester economist Steven E. Landsburg explains how a fair price could be established for distressed assets that nobody wants, using a unique auction strategy.


At 10/14/2008 1:36 PM, Anonymous Anonymous said...

If a financial institution accepts the dilution of it's shareholders, in order to recapitalize, what incentive would it have to divest itself of undervalued but still performing assets?

Most of the instruments in question have already been written down aggressively, or these institutions would not need recapitalization.

In effect, the government is purchasing these assets when it takes an equity stake in the institution. Why should it then give up the income and potential appreciation of these assets?


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