A thought on the bailout

If the government feels that it simply must bailout banks that are exposed to toxic derivatives, then this is the policy I would recommend: Any bank that holds a liability of a bank that has received TARP money may sell that liability to the government at some price, however the market value (ex bailout) of that asset will be assessed at zero plus the market value of any real assets that secure the liability. The government debt does not need to be paid for twenty years (which should allow it to qualify as a capital) but will accrue interest at a non-punitive rate until it is paid. The government is first in line to collect payment on the bank's obligations (i.e. the government loan is debtor in possession financing). Without an explicit waiver from the government, the bank can post no collateral, pay no interest, dividends or employee compensation over $500,000 cash per person per year (stock options not exercisable for five years not included) until the debt to the government is repaid with interest. The government may choose to implement standard waivers to, for example, keep the Treasury repo market in operation and perhaps even to support certain markets in bank debt, but the exceptions to government as a priority creditor should be very limited.