THOMAS FERGUSON, thomas.ferguson at umb.edu
ROBERT JOHNSON, raj at ineteconomics.org
Ferguson is professor emeritus, University of Massachusetts Boston and director of research, Institute for New Economic Thinking. Johnson is president of the Institute for New Economic Thinking and former chief economist, Senate Banking Committee.

They just co-wrote the piece “Rule Number 1 for Government Bailouts of Companies: Make Sure Voters and Taxpayers Share in the Upside,” which states: “The model for any bailout by the government should be a variant of Warren Buffett’s famous bailout of Goldman Sachs during the last blowout. Buffett guaranteed himself against a loss by structuring the deal as a sort of convertible bond by combining preferred shares and warrants. The bond part of the deal — the preferred shares — guaranteed that he got paid ahead of any other shareholders. But the bond part also came with warrants that were convertible into stock: if the firm prospered, then the stock component ensured that he shared in the upside.”

This time, unlike last time [in 2008], when Hank Paulson, Tim Geithner, and Ben Bernanke failed to give the public any of the upside, the bailed out firms should be compelled to issue convertible bonds to the government. Those bonds should make the government the senior creditor to the firm for the value of the principal as long as the debt is unpaid. At low interest rates like those prevailing today, there is no reason to burden the firm with additional coupon payments that impair the working capital of firms.”