So the question is, do we throw in some oversight and punitive measures or don't we?

See my latest post. The answer would appear to be, "No, Mother fucker!"

(Imagine Samual L. Jackson saying it)

If the company isn’t publicly traded, the government would take senior debt instead, placing it in the front of the line of debt holders for repayment in the event of a bankruptcy.

If I loan money to the bank of Dewey Cheatam and secure the loan, I am not sure how anybody can get in front of me. I have a property right in that security that I don't believe the government can deprive me of without just compensation. Now, the government could possibly force me to accept the present value of my collateral, but that wouldn't put the government in the front of the line.

I assume what the government would want is to maintain the first position on the money it lends. An example would be a bank that lends money to a consumer to purchase an automobile obtains a "purchase money security interest," first lien position on the auto because if the bank had not advanced money to purchase the auto, the auto would not exist as collateral for anybody. Another example might be a roofing contractor who gets a construction lien on the value of the roof.

In both of these examples the lien-holder steps in front of older lien holders because their money or labor can be traced to something new. The government does not appear to be lending money to create something new, but to provide liquidity to existing operations. I don't see how it could claim to be in a position in front of earlier debt holders.

If anybody can explain what I am missing, I would appreciate it.

Diluting the existing ownership is the entire point. The fed rides to the rescue, and all the equity holders get wiped out or nearly so. Debt gets converted to equity. That's how bankruptcy works.

We are not trying to rescue the owners of banks. That would be retarded. The only reasonable motivation is to protect depositors and creditors.

But aren't there other investments that depend on the values of these companies? Like IRAs and 401Ks, that may contain shares in these companies. I'm not saying it's a bad thing, I just don't know how much a dilution would effect things we're not trying to effect.

We are not trying to rescue the owners of banks. That would be retarded. The only reasonable motivation is to protect depositors and creditors.

The legislation requires Treasury to take an equity stake equal to the purchase price of the assets being bought.

How much would this dilute the value of the rest of the shares of the company? Will that have a ripple effect on the rest of the economy?

If the company isn’t publicly traded, the government would take senior debt instead, placing it in the front of the line of debt holders for repayment in the event of a bankruptcy.

I'm no economist, but how does that help the company's bottom line? If the government is first in line to get repayment of the money they put up, how is that different from the money simply disappearing in the first place? If I was an investor or creditor to that company, either way I would see the same return (or lack thereof).

I am starting from the position that a bailout is going to happen, period. I agree with you that the wisdom of any bailout is questionable, as I mentioned in my last post. I think that Michael's suggestion in the comments to that post that we loan money to banks using debt as collateral isn't the worst idea in the world. However, it's not going to happen. Letting them fail isn't going to happen. These institutions are going to be bailed out--that's just political reality. So the question is, do we throw in some oversight and punitive measures or don't we?

Are there are methods of saving the various financial institutions from complete insolvency without the taxpayer picking up the tab, if so what are they, and is anyone with power proposing them?

That said, if there is a bailout I like the idea of some kind of oversight board being involved-how it is formed and who should make up its members is debatable, but I like this idea much better than handing over a blank check.

My concern with the prospect of a bail out is that it won't discourage institutions in the future from taking such risks if they think the taxpayer will step in and save their butts again.

Unfortunately the problem today is not liquidity or price-finding, it's insolvency. Bankruptcy for the financial institutions is appropriate.