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Building Better Bailouts: The Case for a Long-Term Investment Approach

58 Pages Posted: 7 Mar 2011 Last revised: 31 Oct 2011

Jeffrey Manns

George Washington University Law School

Date Written: October 27, 2011

Abstract

The Article seeks to fill a crucial gap in the Dodd-Frank Wall Street Reform and Consumer Protection Act: the failure to create a framework for dealing with future financial bailouts. It argues that the federal government’s ad hoc, “break even” approach to the recent bailouts not only shortchanged taxpayers, but more importantly failed to provide deterrence against the type of reckless risk-taking that led to the financial crisis. This Article argues that the key to legitimizing future bailouts and limiting moral hazard is to institutionalize a long-term investment-oriented approach that delineates clear contours and conditions for aid. It calls for establishing an independent agency, the Federal Government Investment Corporation (FGIC), to serve as an investor of last resort, which would make bailout monies contingent on beneficiaries sharing both risks and long-term returns with taxpayers. The FGIC would establish express, ex ante conditions for providing aid that would temper corporate risk-taking, protect taxpayers, and establish bounds to bailouts. Tying government bailouts to shared sacrifices with managers, shareholders, and creditors of beneficiaries, proportional profit sharing with taxpayers, and corporate governance reforms would help to ensure that future bailouts serve a productive purpose.

Keywords: Bailouts, Financial Reform

JEL Classification: K00, K22

Suggested Citation

Manns, Jeffrey, Building Better Bailouts: The Case for a Long-Term Investment Approach (October 27, 2011). Florida Law Review, Vol. 63, p. 1349, 2011; GWU Law School Public Law Research Paper No. 151; GWU Legal Studies Research Paper No. 151. Available at SSRN: https://ssrn.com/abstract=1777562

Jeffrey David Manns (Contact Author)

George Washington University Law School ( email )

2000 H Street, N.W.
Washington, DC 20052
United States

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