Snake Doctor

Interesting read that also has some details about the current crisis I haven't seen before.

http://online.wsj.com/article/SB122230704116773989.html

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Fat Panda

good read

sltr

thanks for posting that, i doubt the gfy econ experts/naysayers will acknowledge it.

duff

Great article, thanks!

pocketkangaroo

In fairness, it is written by a guy who has a lot to gain from a bailout happening.

But if the taxpayers make money, it's only because we paid next to nothing for the distressed assets. If that's the case, the bailout won't really help Wall Street or the economy.

That is the bigger issue here. If you pay more for the bad debt than you should, it helps the banks (which could help the taxpayer), if you don't, it helps the taxpayer. I think that's the trickiest part of this whole thing and the most uncertain element.

Snake Doctor

Well of course it's an opinion piece so you can't take it as gospel, but there are some interesting points.

There is a middle ground where the Treasury can buy this paper for alot more than the vulture funds are willing to pay for it, but still make a healthy return in the long run.

The banks know they're going to take losses on this stuff and they're ready for that....but right now they can't sell the paper for practically any price because there is no buyer.


The interesting point for me in that article was about the insurance. How the real problem in all of this was the reliance on the insurance to bail us out if prices plummeted or borrowers defaulted....apparently the insurance companies weren't charging enough to cover their liabilities.

That point and how the mark to market 157 rule required firms to keep raising more capital every time the value of the paper dropped, even if the drop in value was irrational.

Those were things I hadn't read anywhere else.

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RTP

Good read...he is very optimistic on those numbers - ex. 50% impairment on sub

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ADL Colin

Pimco's Bill Gross published a more sober analysis yesterday that indicated a 7-8% profit -- after borrowing at the T Bill rate. So that would be a profit of roughly $50 billion if the full $700 billion is used. Of course it all depends on what you are paying and no one knows exactly what will happen there or what kind of rates will be necessary to get buyers.

Here is an interesting point though. If the government pays at the close to maturity price
at the beginning then that becomes the market value. Then banks can carry the various financial products at that value and that fixes the balance sheet right up. Example, Washington Mutual might be carrying some CDOs on the books at 20% of the value at maturity assuming some default rate. Since there is no liquidity they are carrying them at some fire-sale price. Whatever price some firm going out of business last sold them at, for example, So the government comes in and buys a similar financial product at say 70% instead of 20%. All of a sudden WaMu writes UP the value of those investments, the asset side of the ledger suddenly improves and VOILA! no need to sell anything.

I can't believe all the articles, blogs, news stories, talk show hosts and so on that don't get the fact that the government is not giving money to anyone but instead purchasing assets with some value. Even some on the Hill don't see to get that.

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ADL Colin

Financial firms only had to start valuing these products at mark-to-market in November of last year. What ugly timing. What good is mark-to-market when the market ceases to exist? I don't think that was thought through. Mark-to-market is fine when there is a deep liquid market. When the only market is bankruptcy sales then everyone gets screwed.

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sltr

while the ROI on the bail/buyout will be seen in the future, it's important to note that this is not a taxpayer funded bailout of the financial institutions at a higher than market value.

the money will come back to the treasury and the maturity value of the purchases will return.

pocketkangaroo

Finding a middle ground is tough though. The more we pay for it, the more the public will be outraged by the price tag. And valuing these distressed assets is real difficult.

I think one problem is that we don't really know the future of housing or credit. We saw huge gains in housing because it was so easy to get credit. There were a lot more people than their should have been out there buying. If strict regulations go into place, or banks wise up and cut back on stupid loans, won't that ultimately hurt the resell value of these assets? I just think it's overly optimistic to assume all these assets are going to shoot up in 5-10 years when we may have seen the last of this huge growth in housing.

But of course the biggest issue surrounding the whole thing is what we could have done with this money in the meantime. We could have invested it into alternative fuels and had a booming energy market in 10 years that dominates the world. We could have improved schools, given more school grants/scholarships and created a smart, innovative generation (like what Asia is doing). We could have improved infrastructure in this country which would ultimately provide solid jobs to people and improve the economy long term.
We could have provided health care for those who can't afford it or just can't get it and allowed people to be not only healthier, but give them more income to spend in the economy.

No matter if we make money on this or not, it won't benefit anything in this country. Our growth and prosperity will stagnate because of this. And a few crooked bankers will end up jumping out with their golden parachutes.

ADL Colin

It's not about making a profit. It's about avoiding catastrophe. That's a hellova benefit if you ask me. Did you see what happened to credit markets last week? All lending stopped. If there's no lending there's no borrowing. If there's no borrowing the economy grinds to a halt.

This was from the WSJ on Sep 17th.
"It?s almost impossible to believe, but the overnight funding markets have seized up again and spreads on key measures of stress have ballooned ? surging past previous peaks hit in both July and March. Analysts call the activity unprecedented, as banks refuse to lend to other banks and investors flock for the safety of Treasury bills, which at one point hit a five-decade low in terms of yields."

This was what Warren Buffet had to say:
"Last week we were at the brink of something that would have made anything that's happened in financial history look pale"

Short term treasuries hit their lowest rates since World War II. The TED spread jumped. Everything was even worse than when the credit crunch first hit in August of last year.

OFF THE CHARTS PANIC!

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sltr

it's my understanding that the buyout legislation being debated currently addresses this issue and does not allow it.

Monk

Ya think? I don't think any auditor/accountant worth a grain of salt would consider that to be "market" price. There still is no "market"... just government intervention.

Monk

Somebody will make money. I imagine the Treasury will find a way to dump these assets out the back door at discounted prices as this housing crisis plods forward. I am sure the cronies who buy it from them will make a great profit.

pocketkangaroo

It's too late. The guys that caused this cashed in. They made millions and millions on a phantom banking system. Telling a guy he can only make $400k a year now when he has half a billion in the bank isn't a big deal.

pocketkangaroo

I know we have to do it. I'm saying that if we had some leadership, if we had people doing their jobs, this wouldn't have been so bad. People in government sat with their thumb up their ass over the years while this shit took place. A lot of people saw it coming. It could have saved us a lot of money if someone had stepped up a few years ago and taken charge of the situation before it got out of hand.

ADL Colin

Good point, Monk. Really, I'm not sure.

When you purchase bonds from the treasury is that a market price?

If this new entity purchases financial products in a reverse auction is that a "market price"?

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ADL Colin

Sure. "Mistakes were made". ;-)

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sltr

while i am not current on all the executive payout #s, i would not think there are many who had a half billion dollar golden parachute. no matter how many there are/were, i feel it's important to look to the future with new regulations.

i'm confident the u.s. can deal with this crisis and move forward in a positve and healthy direction.

Snake Doctor

Yeah but what's fair is fair. They were using mark to market to write up the value of assets in the good times and make their stock prices jump and cash in on bonuses.
They also used the mark to market rules to get tax advantages on stock options.

So they also need to take it in the ass with the mark to market rules in bad times.


Changing accounting rules in the middle of a crisis would just make things worse....they may review things afterwards though and come up with a new procedure.

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Agent 488

most think 3-5% if that.

kenny

Is those assets are so great than why isn't anybody else buying them?

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kenny

Say the tax payer is left holding this bag of "toxic" assets.

1) What stops the banks from taking that $700 billion and doing something else stupid?

2) Why should the banks be rewarded with a fresh start while tax payers are left cleaning up their mess?

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grumpy

its one big scam by your goverment. Now they own fanny and some other mortgage companies. With the 700M they will own mortgages and have houses as a guarantee. See it coming!!

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kenny

I like some of these ideas better.


http://dealbook.blogs.nytimes.com/20...t-alternative/


Why is there no discussion of a bailout modeled after what the Swedish govt. did in the 1990s?

It seems their solution achieves the goals of the current bailout.. which is simply to facilitate loans on the street by injecting capital? (ie: forcing banks to mark their assets to market.. at whatever value the market determines to be, then recapitalizing the banks with tax payer dollars in return for warrants)

The current proposal of simply buying the toxic assets is not politically nor ethically feasible. The Swede?s solution forces the banks and their investors to be responsible for their actions, reduces the risk and burden on the taxpayers, and allows the taxpayers a potential reward if the bailout is successful.

Ricciardi?s solution doesn?t work because with the government backing the assets, this sets an artificial value for the assets.. the taxpayers take the risk while private investors get the benefit.

? Posted by Norm

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