There is a significant controversy ensuing between the administration and various factions in Congress over warrants and related issues such as executive compensation.

Democrats are reportedly pushing hard, suggesting there is evidence of huge over-valuations of warrants and they need to capture the value.

Republicans are reportedly saying the stock is worthless and the taxpayers need to be safeguarded.

While the Democrats are pushing to keep the provisions in a final package, the Treasury wants them out.

Some policymakers seem to be confusing what was supposed to be the focus of the proposal and its goals. The focus was supposed to be on "assets" -- not institutions -- and the goal was supposed to be to stabilize the broader financial real estate/mortgage markets. This goal was to be accomplished by creating a failed or troubled asset fund to purchase, at auction, mortgage assets that would help stabilize the broader financial markets and the real estate/mortgage markets.

But the original goal has been confused with a new (or supposed) goal to bail out institutions.

Although controversial, it is logical for federal policymakers to extract warrants and limit executive compensation if an institution is being bailed out by the taxpayer.

If the goal, however, is to purchase failed assets -- such as all of the tranches in the special purpose vehicles -- so that the mortgage loans can be worked and resolved more quickly and the capital markets system can be unclogged, then warrants do not make any sense and would make proposals that confuse these issues unworkable.

Under a failed asset fund, the Treasury's asset managers' price will be set through an auction. Presumably, the goal is to get the assets close to the "hold to maturity" price rather than fire sale price. (Treasury will need to design mechanisms to get to that price.)

Also, in buying securities, the loans would remain outstanding and the servicers might still face conflicting requirements for loan modifications and workouts. But taking the loans out of the securitizations and resolving the loans eliminates the problems. This could be done by having the legislation create a new federal entity under the Treasury Department that would act as a substitute trustee for mortgage-backed or other securitizations. Thus, the new substitute trustee could direct the servicer to offer troubled loans for sale to the Treasury. Then the Treasury would be able to direct, consistent with all of its policy objectives, loss mitigation activities relating to the loans that are sold to Treasury.

Resolving the underlying uncertainty with regard to the assets themselves -- which are spread widely throughout the financial system -- versus focusing on the stability of a few individual institutions will begin to bring stability to the system. Secretary Paulson has stated that Treasury wants to buy assets from thousands of institutions (and presumably, investment vehicles), so warrants, etc., would not be workable. The secretary has also said that he is in favor of an oversight board.

Short-sellers and others who do not want to bring stability to the system are, of course, trying to confuse the issues described above so that any program that may be enacted will not work, or at least not very well. The result, of course, will be continued instability in the markets -- an environment that benefits them handsomely.

Some policymakers should consider establishing a failed institution fund separately from a failed asset fund.