Fixing Geithner's Plan : Planet Money Harvard Professor Lucian Bebchuk says Geithner's toxic asset plan needs more competition.
NPR logo Fixing Geithner's Plan

Fixing Geithner's Plan

Harvard professor Lucian Bebchuk is proposing a fix for Treasury Secretary Timothy Geithner's plan to deal with toxic assets. In today's Washington Post, Bebchuk argues that the government needs to do more to make private investors compete to take part in the program. He writes:

If the private side were to contribute only 8 percent of the capital, the government should seek to keep the highest fraction of the upside that would be consistent with inducing such participation. To this end, potential private managers would submit bids indicating the minimum share of the fund's upside that each manager would be willing to accept for an 8 percent investment, as well as the size of the fund that the manager would establish if accepted into the program. Treasury officials should then set the share of the upside going to the private side in each of the funds under the program at the lowest level consistent with establishing funds that collectively have the aggregate target capital.

Alternatively, assuming that the private side's share of the upside is fixed at 50 percent, the government should seek to get the largest possible contribution of private capital. Under this scenario, managers would submit bids indicating both the size of the fund each manager would establish and the maximum fraction of the fund's capital that the manager would commit to raising privately in return for 50 percent of the upside. Based on the bids, the government would set the fraction of capital provided by the private side at the highest level consistent with establishing funds that have the target amount of aggregate capital.


Bonus: Read Bebchuk's paper "How to Make Tarp II Work."