In the next week it’s important to focus on what a private capital solution to this crisis would look like, in order to judge whether the public capital solution measures up. Let’s assume for sake of argument that Washington Mutual (instead of every bank in the world) was the holder of way too many mortgage bonds that were defaulting. And it came to Goldman Sachs and said will you buy these toxic bonds so I can clean up my balance sheet. And let’s assume Hank Paulson was still CEO of Goldman Sachs.
Would Paulson take the bonds in the hope that someday he could sell them? NFW. If he took them at all, he would also take a warrant that would give him majority ownership of Washington Mutual, if he chose to exercise it.
Why should Hank Paulson, Secretary of the Treasury negotiate any differently than Hank Paulson, CEO of Goldman Sachs?