Paulson Caving, Bailout Plan Getting Better

NEW: Paulson and Bernanke defend plan on Capitol Hill. Bernanke confirms that a key element of plan is having government pay far more than market prices for crap assets.

EARLIER: The Treasury has agreed in principle to a few key changes to the bailout plan:

More Congressional oversight
A homeowner bailout, possibly in the form of adjusted mortgages for people who are struggling but can actually afford the houses (and a provision preventing renters from being booted when houses are foreclosed on--which will likely clobber the resale market), and
Ability for government to take an equity stake in companies it helps, with the decision possibly dependent on the amount of capital the government puts in play.

The last piece is important. It's not clear why Paulson left it out of the original plan, because he has used it in all the previous bailouts and it was used successfully in Sweden in the early 1990s, but in any event, now it appears to be included.

Paulson is holding fast on one key point, which is sensible:

Limits on executive pay at companies who accept government money. This makes sense in theory, but in practice it would be a nightmare (how much is enough? Who gets to decide? For how long?). Paulson also believes it would deter companies from taking the money. He's certainly got that right.

According to the WSJ, Paulson is willing to compromise here, too--perhaps setting the curbs only on companies in which the government has put a large amount of money at risk.

Paulson's goal is to encourage companies to participate, so they can clean their books and get lending again. He doesn't want the choice to be between bankruptcy and assistance, because the process will take too long. This, too, is a worthy goal, but it is also one that will result in the Treasury overpaying for bad assets, bailout out bank shareholders, and socking taxpayers with the bill.

Paulson's stance to this point has been admirable: Make bailouts better than bankruptcy, but not by much. If speed is the goal here, which it should be, one way to encourage participation might be to put a short clock on the offer: tell us in 30 days whether you want to play or not, and if you don't, you're on your own. Some banks, of course, would gamble and lose, but the hell with them. You don't need all the country's banks working well again. You just need some.