[XXPANTHAXX]

During World War I, Americans were exhorted to buy Liberty Bonds to help
their soldiers on the front.

Now, it seems, they will be asked to come to the aid of their banks —
with the added inducement of possibly making some money for themselves.

As part of its sweeping plan to purge banks of troublesome assets, the
Obama administration is encouraging several large investment companies
to create the financial-crisis equivalent of war bonds: bailout funds.

The idea is that these investments, akin to mutual funds that buy stocks
and bonds, would give ordinary Americans a chance to profit from the
bailouts that are being financed by their tax dollars. But there is
another, deeply political motivation as well: to quiet accusations that
all of these giant bailouts will benefit only Wall Street plutocrats.

The potential risks — politically for the administration, and
financially for would-be investors — are considerable.

The funds, the thinking goes, would buy troubled mortgage securities
from banks, enabling the lenders to make the loans that are needed to
rekindle the economy. Many of the loans that back these securities were
made during the subprime era. If all goes well, the funds will
eventually sell the investments at a profit.

But, as with any investment, there are risks. If, as some analysts
suspect, the banks’ assets are worth even less than believed, the funds’
investors could suffer significant losses. Nonetheless, the
administration and executives in the financial industry are pushing to
establish the investment funds, in part to counter swelling hostility
against the financial industry.

Many Americans are outraged that companies like the American
International Group paid out many millions in bonuses despite crippling
losses and multibillion-dollar rescues from Washington.

The embrace of smaller investors underscores the concern in Washington
and on Wall Street that Americans’ anger could imperil further efforts
to stimulate the economy with vast amounts of government spending. Many
Americans say they believe the bailout programs — and the potentially
rich profits they could yield — will benefit only a golden few,
including some of the institutions that helped push the economy to the
brink.

“This is an opportunity to forge an alliance between Main Street, Wall
Street and K Street,” said Steven A. Baffico, an executive at BlackRock,
referring to the Washington address of many lobbying firms. BlackRock, a
giant money management firm, is playing a central role in the
government’s efforts and is considering creating a bailout fund. “It’s
giving the guy on Main Street an equal seat at the table next to the big
guys,” he said.

The new funds are still under discussion, and they are unlikely to be
established for several months, if indeed the plans go through at all.

But the comparison one industry official uses to illustrate the mistake
that America must avoid is the large-scale privatization in Russia in
the 1990s, which involved a transfer of entire industries to a few,
well-connected oligarchs. That experience tarnished the idea of
free-market capitalism in Russia and undermined its program to move
toward a market economy.

“It is really, really important to allow Main Street in,” said the
official, who was involved in discussions about the plan but who asked
for anonymity because he was not authorized to speak about it publicly.
“They are getting taxed for this problem. They should have an
opportunity to participate in the recovery.”

Still, it is unlikely that everyday investors would play a major role in
financing the bailouts through these funds. Hedge funds and other
private investment firms are expected to invest far more money. The
Treasury has not said how much money it intends to raise from
individuals; first it wants to select about five fund managers to
participate in the program to buy beaten-down securities. These firms
must demonstrate an ability to raise about $2.5 billion among them. It
may select several more fund managers later.

Perhaps more important than the money would be the political bonus of
having thousands or even millions of taxpayers — whose portfolios have
nose-dived during the crisis and whose tax dollars are financing bank
bailouts and stimulus packages — profit from the toxic asset plan.

To head off the political risk of using public subsidies to move the
assets from banks into the hands of private investors, the Treasury has
already announced that, as part of its plan, it will retain part
ownership of the toxic securities and loans, thus ensuring that
taxpayers will share some of the gain if the assets’ prices rise.

But the plan to allow small investors to participate directly with their
own money goes further.

Critics like Joseph E. Stiglitz, a Nobel Prize-winning economist, argue
that the bailouts merely privatize profits and socialize losses.

But if the plan goes well, including everyday Americans as buyers of the
assets may encourage them to support the government’s program and avoid
another American International Group-style firestorm. If investors lose
money, however, the effort could backfire.

“If this turns out to be great but you have kept it away from Mom and
Pop and the rich are favored, that looks bad, but it’s also bad if you
have people who are burned,” said Jay D. Grushkin, a partner at the law
firm of Milbank, Tweed, Hadley & McCloy.

Some of the biggest investment managers in the United States, including
BlackRock and Pimco, have been consulting with the government on ways to
rebuild the country’s broken financial markets.

On the day the plan was announced by Treasury Secretary Timothy F.
Geithner, both Bill Gross, the co-chief investment officer of Pimco,
described it as a “win-win-win policy,” and Laurence D. Fink,
BlackRock’s chairman and chief executive, said his firm would take part.

The fund industry has been in discussion with the government but insists
the Treasury has not been prescriptive about the type of funds it wants
established. In its letters to potential investors, however, the
Treasury requires fund managers to set out how they will include retail
investors, saying applicants “must note whether, and if so how, it plans
to structure the fund to facilitate the participation of retail
investors in the fund.”

Individuals could participate in the funds by investing just a few
hundred dollars, although the details are still being worked out.

If selected — likely to happen by mid-May — money managers like
BlackRock could begin a fund within weeks.

As well as BlackRock and Pimco, Legg Mason, another big mutual fund
company, and BNY Mellon Asset Management, a big asset manager, have said
they are interested in starting retail investment funds to participate
in the government’s plan.

For the investment managers, the benefits are potentially large. These
big firms can charge healthy fees to investors for taking part. They
will also have the marketing prestige of being the firms the government
turns to at a time of crisis to help sort out the country’s financial
mess.