A Plan for Addressing the Financial Crisis

From: Julie McBride <corp_gov_at_law.harvard.edu>
Date: Thu, 25 Sep 2008 10:15:30 -0400 (EDT)

Program on Corporate Governance
Harvard Law School
http://www.law.harvard.edu/programs/olin_center/corporate_governance

With Congress examining the Treasury Department's proposed emergency legislation for solving the financial crisis, the Program on Corporate Governance is pleased to announce that it just issued the following discussion paper on addressing this crisis:

A Plan for Addressing the Financial Crisis
by Lucian Bebchuk
Download Paper

Below please find the abstract of the paper.

Abstract: This paper critiques the proposed emergency legislation for spending $700 billion on purchasing financial firms' troubled assets to address the 2008 financial crisis. It also puts forward a superior alternative for advancing the two goals of the proposed legislation ? restoring stability to the financial markets and protecting taxpayers.

I show that the proposed legislation can be redesigned to limit greatly the cost to taxpayers while doing much better in terms of restoring stability to the financial markets. The proposed redesign is based on four interrelated elements:

? No overpaying for troubled assets: The Treasury's authority to purchase troubled assets should be limited to doing so at fair market value.

? Addressing undercapitalization problems directly: Because the purchase of troubled assets at fair market value may leave financial firms severely undercapitalized, the Treasury?s authority should be expanded to allow purchasing, again at fair market value, new securities issued by financial institutions in need of additional capital.

? Market-based discipline: to ensure that purchases are made at fair market value, the Treasury should conduct them through multi-buyer competitive processes with appropriate incentives.

? Inducing infusion of private capital: to further expand the capital available for the financial sector, and to reduce the use of for public funds for this purpose, financial firms should be required or induced to raise capital through right offerings to their existing shareholders.

Compared with the proposed legislation, the alternative proposal put forward in this paper would provide a far better way to use taxpayers? money to get the financial sector out of its current predicament.

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Posts placed during the past week include:
Fed Relaxes Traditional Control Rules for Private Equity and Other Minority Investments in Banks and Bank Holding Companies
Developments in Takeover Defense
SEC Loosens Restrictions on Issuer Repurchases; Insider Trading Considerations Continue to Apply
SEC Issues Order Temporarily Banning Short Sales of Public Securities of 799 Financial Companies
Treasury Encourages Development of Covered Bonds in the U.S. and Issues "Best Practices"

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Received on Thu Sep 25 2008 - 10:15:30 EDT