September 23rd, 2008

Now we can read the Dodd plan, it’s clear that the equity stake taken in the banks is contingent. The shares only vest if the Garbage Pail agency makes a loss, so the measure is essentially punitive (and quite right too). This fits the Brad deLong diagnosis, but it’s not a capital injection, as the competing Krugman diagnosis requires.

This can be fixed quite easily. When a bank sells a bucket of sludge to the GPA, the GW Bush Memorial Fund buys new shares in the bank equal to 25% of the transaction price; and the bank gives the Fund a second tranche of new contingent shares equal to 100% of the transaction price.

(Updates this post.)

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