I can’t believe I heard one of the talking heads say, with a straight face, that given enough time, the taxpayer may actually profit on the assets being bought out. If that was really true, then why stand in front of the private sector (presumably in the business of taking exactly that risk).

If private entities are able to see an opportunity in buying one of the “survivors” (Wachovia is next?), then the “bailout” really should focus on those institutions that – like Lehman – are worth more dead than alive.

And then, regarding those zombie banks, the same rationality should be applied: carve up the carcasses, and save your taxpayer money for direct subsidies to the defaulting borrowers on the worst of the worst loans (who can demonstrate good faith and no speculation in their initial investment motivation). The vultures and BK buyers will eat that which isn’t “rescued”, as they should.

Let’s turn some of that wall street ingenuity to the task: create an instrument for which these underwater loans can be exchanged. I liked the idea of shared appreciation mortgages, where the overleveraged bank is given a hard lien on the property. Write a 50 year mortgage at compromise rate (let it be a floater off of treasuries), where payments are leveled by a [macro swap] structured by the gov’t. Let the banks restrict assignability until they’re paid back 85-90% of their principal (in an environment where regional house prices have remained below, say, 2005 prices, else, they’re entitled to 100% of their principal), and let them account for these TARA-lite loans separately in their capital computations. If prices increase, the borrower repays the bank the full amount, if prices remain flat/continue down, the borrower keeps their home, eventually pays it off, and the bank/holder takes a fixed loss. Gov’t’s involvement is largely restricted to structuring the macro swap to enable fixed rate loans off the floating instruments.

Personally, I’d rather we were debating the merits of something akin to a private solution that capitalizes on financial engineering than on the merits of socializing economic losses.