Ben Bernanke - the Fed Chairman commented today that the government has no plans to "nationalize" banks or other financial services. This is good news. I've posted before about the moral hazard involved with partially nationalizing an industry. As the article notes, he leaves open room for the government to get involved in a different capacity. This isn't necessarily a bad thing. I've heard several options considered:
1) Voucher program - essentially financial services firms are provided capital in tranches and receive the new tranche only after demonstrating that pre-conditions have been met. This would force management to take designated actions to continue to draw down funds. It's an improvement over the TARP approach which essentially skipped attaching strings.
2) Government as co-investor - this could take several roles - debtor-in-possession financing for bankrupt companies unable to secure financing elsewhere, for example. This is the pronounced fear of the auto industry - no one will lend to them in bankruptcy. The government can provide the DIP financing with stringent criteria attached.
My thought is that the government should engage an experience distressed debt manager as a lead manager and function, effectively as a distressed debt fund. I know, fox in the hen house, but this could lead to better terms for taxpayers and tighter controls on management. Essentially, we, as taxpayers, become investors in the fund and the fund manager is/should be functioning in our best interests. Taxpayers win, companies get work-outs, management takes a beating. But that would happen in a private work-out, so that's nothing new. I don't have the access to detail that Bernanke and Geithner, et al, have but I think its an interesting approach to a complex dilemma.
