It looks like the US Treasury has not yet decided on a plan to deal with the bad assets now on the balance sheet of banks even though it was reported that several ideas in this regard have been floated already. Well, here is one more idea from someone who has no axe to grind to be taken for what it is worth. The idea is presented as a fictitious example but the principles enunciated should be regarded as universal and applicable with modification if necessary to different situations.
Let us suppose Bank A has a portfolio of shaky assets originally worth one billion dollars. The bank auctions the entire portfolio as a bundle and receives a few bids, the highest being worth 300 million dollars from a company called Liquidators & Co. (L&C).
The US Treasury, together with L&C, form a company that buys the portfolio of assets from Bank A under the following conditions: The Treasury pays 100 million dollars immediately and receives one third of the common stock. L&C agrees to pay 200 million dollars for which it receives two thirds of the stock if it pays the entire amount immediately. Otherwise L&C may opt to pay as little as 100 million immediately and consider the remaining 100 million to be a loan from the bank. The two agree on a modality for payment, including the interest rate, while the bank holds as collateral one third of the stock.
The bank now has a balance sheet that is free of bad assets; it has 200 million extra dollars in cash and a 100 million dollar certificate considered to be of the highest grade. This balance sheet is so well healed, the bank will have no trouble going about the business of borrowing from the Fed and lending money to worthy clients.
As for L&C, it can take possession of the one third portion of the stock held by the bank on an all-or-nothing basis only. Until this happens, it will not be in a position to out-vote the Treasury, and all decisions will have to be made and/or approved by two of the three parties to the deal. L&C will then go ahead and liquidate, break-up, develop, combine or bundle the assets in the portfolio as it sees fit so as to maximize the proceeds.
If L&C chooses to keep one or more of the assets in the portfolio for itself, such assets will be auctioned off and L&C will bid for them against other companies that may be interested in them as well. When all is said and done, if L&C makes a profit, the Treasury will receive one third of that. Otherwise, it will absorb its share of the loss.
I believe this is a fair deal for everyone because it addresses all the concerns I heard so far.