Bank Bailout Menus 1

1 We thank Christopher Hennessy for valuable discussions and comments as well as two referees Abstract Bank Bailout Menus We study bailouts of banks that suffer from debt overhang problems and have private information about the quality of their assets-in-place and new investment opportunities. Menus of bailout plans are used as a screening device. Worse bank types choose larger bailouts. Constrained-optimality involves overcapitalization of banks and nonlinear pricing (e.g. the bailout agency receives proportionally more shares in larger bailouts). Equity injections and asset buyouts are equivalent when new investments follow the assets. The larger capital outlay involved in asset buyouts can be offset by borrowing against the assets. If investments follow the bank, equity injections offer more upside to the bailout agency than asset buyouts. But upside can damage as well as enhance efficiency, depending on whether screening intensity is needed mostly on assets-in-place or new investments.