Compensation Limits on a Government Giveaway?

In keeping with its long pattern of unnecessarily granting anonymity, often in violation of its own policies, the New York Times recites,

But some executives at private equity firms and hedge funds, who were briefed on the plan Sunday afternoon, are anxious about the recent uproar over millions of dollars in bonus payments made to executives of the American International Group.

Some of them have told administration officials that they would participate only if the government guaranteed that it would not set compensation limits on the firms, according to people briefed on the conversations. The executives also expressed worries about whether disclosure and governance rules could be added retroactively to the program by Congress, these people said.

The easy reply to that is, "Okay then, don't participate." But let's think for a moment - why would this even be a concern? They're entering the program as investors not employees, right?

Well, sort of.

They're barely investing. The plan is overwhelmingly generous, and we may be looking at an "investment" of only $3 for ever $97 in taxpayer money put on the line. Picture the moral hazard:

• The "investor", with its comparatively minimal contribution and vast quantities of federal money in the form of non-recourse loans, snaps up a bunch of securities.

• Based upon its profitable investments, the investor draws out the maximum return allowed under the plan, keeping its stake in the plan to an absolute minimum.

• Within a year or two, it becomes apparent that they overpaid for most of the securities, and their investment is a long-term disaster.

• Once they've recouped their investment, perhaps also taking a reasonable return on their actual stake, they walk away and leave taxpayers with the mess.

Taxpayers at that point might cry, "Foul!" The investor would have increased our exposure by overbidding for securities, so why should he be allowed to draw out billions of dollars while costing taxpayers many times that amount?

Is "Because otherwise he wouldn't have 'invested'" an adequate response?
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Update: Krugman's done the math. I'll defer to his numbers not only because he's, you know, a Nobel Prize-winning economist, but because he's actually done the math. ;-)