Privatizing the bailout

This week I’m going to be posting about solutions to our country’s financial meltdown that employ free market principles. (Some of them came up in your comments to previous posts, so thanks.)

Phil Kerpen has another idea for raising the $700 billion to buy up shaky mortgage assets:

A Treasury facility could be set up to operate exactly as suggested by the original Paulson plan. As such, it would buy troubled assets to provide markets liquidity and serve a price-discovery function. However, instead of funding the facility by selling Treasury bills that would impose a debt on future taxpayers, some or all of the fund could be constructed of capital that is voluntarily committed by private entities. 

And here’s the tax-cut sweetener: All funds invested in the facility for a five-year holding-period would be tax-free, exempt from the capital-gains tax, the corporate tax, the death tax, the repatriation tax, and any other tax that would otherwise apply.

Based on the number of commentators who are convinced the government will make money on this deal, the private capital would pour in. Billionaire investor Mark Cuban suggests that the new Treasury facility trade on a stock exchange as an exchange-traded fund. Cuban says that he and many others would be interested in such an investment.

The tax-exemption also would boost general investor interest by raising the after-tax rate of return of the rescue facility. With asset prices as low as they are, the Treasury facility would be a pretty good bet. This concept could even be taken a step further: Private entities could be authorized to establish in accordance with the rules for purchasing distressed assets, qualifying them for the new mega-tax exemptions and allowing them to compete with the Treasury-run rescue facility.