As part of the giant Wall Street bailout that Congress is negotiating this week with the Bush administration, Sen. Jack Reed is working on a mechanism that could make financial companies reimburse taxpayers for settling their bad debts.
Reed, a banking committee member who played a role in last summer's legislation to prop up the mortgage industry, has proposed a method of giving the Treasury the right to take shares in companies that sell their bad assets to the federal government. In return for covering such debts, the government would get ``warrants'' from a troubled company that, in effect, promise shares in the company as a way of enforcing repayment.
Therefore, according to Reed's staff, a troubled company will have very little incentive to try to sell its worst assets to the government at high prices. In the event that a troubled company fails even after the bailout, Reed's warrant system would put the taxpayers at the front of the line for partial repayment during bankruptcy proceedings.
If a company succeeds after the bailout and begins to make profits, the warrant system would let the government - and by extension the taxpayer - share in those gains.
"This is a mechanism that recognizes the need to help troubled companies recover, but it also allows the taxpayer to get paid back as the companies profit,'' Reed said in a news release yesterday. ``Taxpayers should not be forced to assume all the risk and then let the companies get all the reward. That is not fair in any kind of deal,'' Reed said.