Bookstaber Looks for a Government Bailout

Rick Bookstaber thinks that bailouts – some bailouts, anyway – can be a jolly good idea. If Citadel can bail out troubled companies and make money at it, why can't the government do so as well?

To be specific, what if the government maintained a pool of capital on the ready to buy up assets of firms that are failing, much as Citadel did for Amaranth and Sowood? Of course, if a private entity is willing to step up to the plate, all the better. But as a last resort, what if the government took on the role that Citadel did in these instances. There would be no moral hazard problems, since the firm still fails. But the collateral damage would be contained; the market would be kept from going into crisis, the dominos would be kept from falling. And the taxpayer would have good odds of pocketing some profits.

One precedent which springs to mind came in August 1998, when the Hong Kong government spent $15 billion buying up stocks in an ultimately successful attempt to support the Hang Seng index.

When I was in England, an individual investor asked me where and how he could buy some of these illiquid debt products which are reportedly trading at 35 cents on the dollar or so – a very attractive price for a buy-and-hold investor who doesn't mark to market. I said that I had no idea: the financial markets have been steaming full speed ahead for many years and have basically left retail investors behind. This is a good thing in that retail stock-heavy investors really haven't suffered from the present crisis, but it's a bad thing in that all that retail money is essentially unavailable for bailout purposes.

The government, of course, is not a retail investor, and could if it wanted step in and buy up illiquid debt by the bucketload. I just can't see it happening in practice, though: the politics of deciding what to buy and what not to buy would be so fraught that economic considerations would rapidly go out the window.

While I'm at it, here's a Special Bonus Link for you: A great review of Bookstaber's book.