A little slice of the developing Citigroup rescue:

Regulators were debating various terms of the arrangement on Sunday, including whether the government would receive preferred stock or warrants, which are instruments that give holders the right to buy stock. Preferred stock would be more beneficial to taxpayers because Citigroup would pay dividends on those shares; warrants would be more attractive to Citigroup’s existing shareholders, since they would not immediately dilute the value of their investments as much as preferred stock.

What, exactly, is the nature of the debate?:

Regulator 1: Preferred stock would be beneficial for taxpayers, whose interests we represent.
Regulator 2: But warrants would be more favorable for existing shareholders, whose interests we don’t represent.
Regulator 3: This sure is a tough decision!

I’m confused.

UPDATE: Knowledgeable correspondents say the NYT‘s summary of these issues is wrong. Warrants could be more favorable to taxpayers under certain scenarios. In particular, if coming to Citibank’s aid results in Citibank shares being much higher five years from now than they are today, then warrants would be better for taxpayers. Basically, under a warrants scenario if the rescue works really well then the taxpayer makes a lot of money.

I haven’t really had the chance I would like to focus on the NBA so far this season, and the deplorable state of the Wizards hasn’t given me a ton of incentive to change that. But lo and behold Donnie Walsh has actually succeeded in making the deals necessary to ensure that the Knicks will have the cap space necessary to make a max offer to LeBron James (or Chris Bosh or Amare Stoudemire) in 2012.

Brought to you by Josh Blivens.

A whole lot to chew on in today’s New York Times piece on Citigroup, but this graf is of particular interest to me:

“Chuck Prince going down to the corporate investment bank in late 2002 was the start of that process,” a former Citigroup executive said of the bank’s big C.D.O. push. “Chuck was totally new to the job. He didn’t know a C.D.O. from a grocery list, so he looked for someone for advice and support. That person was Rubin. And Rubin had always been an advocate of being more aggressive in the capital markets arena. He would say, ‘You have to take more risk if you want to earn more.’”

Obviously not what you want on your epitaph as the company goes under. But at the same time, it’s perfectly true. The more risk you take on, the more potential for profit. And this is what’s so disturbing about what’s going on in terms of financial institution bailouts. I’m happy to believe the folks who say these kind of interventions are necessary. But if they’re going to be done, there’s both the practical question of how to regulate so as to avoid moral hazard, and also a huge question of social justice. If people can get very rich taking on risks that are partially offloaded onto the public at large, we have a problem. Or, more specifically, we need to tax those people and use the revenues to better-assist ordinary people in dealing with risks.

Consider the contrasting fates of a financial sector CEO who earned tons of money and through mismanagement caused his firm to go bankrupt and that of someone who operates the cash register at Circuit City and through no fault of her own wound up laid off. Both are looking at unemployment; perhaps even a prolonged spell of unemployment. But the CEO was living very high on the hog throughout the fat years, the woman at the cash register not so much. And the CEO, even with a large swathe of his fortune wiped out by the crash, will still be left with savings and assets that dwarf those of the average American. And why? Skill-biased technological change? Was the woman running the cash register really not competent enough to run Citigroup into the ground? Anyone can make money while the market goes up and lose it when the market goes down.

It’s quite true that members of congress who aren’t independently wealthy are placed under some real financial strain by the modern-day need to maintain two residences. My understanding is that it used to be the case that most members would simply move to DC. Congress works in DC, and people normally live in the metro area where their job is located. But moving oneself and one’s family to the dread Beltway has become a political liability, so people don’t do it. Thus, Atrios’s plan for “the construction of some sort of Congressional dormitory type thing” has some real merit to it. At the same time, it sounds hilarious — I’m imagining fun pranks and keggers.

The larger issue here, however, is that members of congress and high-level executive branch officials need to be paid more. These people make decent salaries — they’re not poor. But at the same time, folks like a backbench member of the House of Representatives or the Assistant Secretary of State for Latin America are supposed to be important actors in American society. It’s not a good idea for them to be making orders of magnitude less money than important people in the private sector. Somewhat less, sure. But over time the relative salary of a cabinet secretary versus a corporate executive has eroded enormously for no good reason — it’s not as if the budget savings involved are large enough to make an appreciable difference.

Meanwhile, this becomes a problem when you get deeper down into the regulatory agencies. If the EPA is supposed to be able to assess the level of pollution somewhere and take a bad actor to court if he violates the law, then the EPA needs to have good scientists and good lawyers working for it. That means those people need to be paid salaries that are competitive with what people in those fields can make in the private sector. If you don’t do that, then you either get people who are incompetent or, worse, the “revolving door” phenomenon in which the real value of government work is to cash in later by defecting to the private sector in a way that corrupts the regulatory process.