Our financial system is crumbling this week.

[Hungary Jack]

It's a horrible idea because you are rewarding many people who speculated foolishly on rising home values and got burnt. You also reward the lenders that made loans to people who had no business getting loans.

Doesn't the Paulson plan already do this? It calls for the government to overpay to buy bad loans thereby subsidizing the rich bankers who made these bad investments.

I was thinking that, too.

The Paulson plan is a fire sale. The types of toxic securities that Paulson proposes to buy will likely be bought for cents on the dollar. For example, about 6 months ago Merrill Lynch sold a bunch of securities to a private investor for about 21 cents on the dollar. Today's prices may likely be lower, and the Treasury is not proposing to buy all securities--only enough so that some sort of market is established for these things so that some reliable valuation may be attached to them.

The mechanism for purchasing these securities is a reverse auction. Outside of collusion among the firms trying to sell these securities, I don't see how the Paulson plan will "overpay" for bad loans.

The companies that bought these things have been punished pretty severely already by the stock market, and this bailout is not going to infuse them with tons of capital so that there stock price recovers. In theory, it will get the crap off the Balance Sheet so that the Balance Sheet actually makes some sense.

Finally, I am not sure who these "rich bankers" are. The guys who ran the small investment operations that put an entire firm's capital at risk have mostly been fired. Most of the CEO's on whose watch this occurred have been fired.

[greenback44]

The mechanism for purchasing these securities is a reverse auction. Outside of collusion among the firms trying to sell these securities, I don't see how the Paulson plan will "overpay" for bad loans.

These aren't vanilla bonds, so if A puts up a better "reverse bid" than B, then that may only mean A's junky MBS's are worse than B's junky MBS's.

I don't see how a reverse auction works effectively here. The comparisons between securities don't work at all naturally.

[Hungary Jack]

The mechanism for purchasing these securities is a reverse auction. Outside of collusion among the firms trying to sell these securities, I don't see how the Paulson plan will "overpay" for bad loans.

These aren't vanilla bonds, so if A puts up a better "reverse bid" than B, then that may only mean A's junky MBS's are worse than B's junky MBS's.

I don't see how a reverse auction works effectively here. The comparisons between securities don't work at all naturally.

I would assume the bond portfolios will have payment histories for all of the individual mortgages that make up each security. This will allow at least some comparison. Of course no one knows how many more borrowers will simply stop paying because their mortgage is under water or they lost their job.

But I don't get how one can assert that the government will "overpay" for these securities. But then again, this is GRB in the offseason, where almost every contract is labeled as "overpaying."

[AWvsCBsteeeerike3]

The mechanism for purchasing these securities is a reverse auction. Outside of collusion among the firms trying to sell these securities, I don't see how the Paulson plan will "overpay" for bad loans.

These aren't vanilla bonds, so if A puts up a better "reverse bid" than B, then that may only mean A's junky MBS's are worse than B's junky MBS's.

I don't see how a reverse auction works effectively here. The comparisons between securities don't work at all naturally.

I would assume the bond portfolios will have payment histories for all of the individual mortgages that make up each security. This will allow at least some comparison. Of course no one knows how many more borrowers will simply stop paying because their mortgage is under water or they lost their job.

But I don't get how one can assert that the government will "overpay" for these securities. But then again, this is GRB in the offseason, where almost every contract is labeled as "overpaying."

That was a good one!!

If these securities had a warp of 7 even 6.5, I could see the justification, but it's only 3....weak.

[Arthur Dent]

The Paulson plan is a fire sale. The types of toxic securities that Paulson proposes to buy will likely be bought for cents on the dollar. For example, about 6 months ago Merrill Lynch sold a bunch of securities to a private investor for about 21 cents on the dollar. Today's prices may likely be lower, and the Treasury is not proposing to buy all securities--only enough so that some sort of market is established for these things so that some reliable valuation may be attached to them.

The mechanism for purchasing these securities is a reverse auction. Outside of collusion among the firms trying to sell these securities, I don't see how the Paulson plan will "overpay" for bad loans.

The companies that bought these things have been punished pretty severely already by the stock market, and this bailout is not going to infuse them with tons of capital so that there stock price recovers. In theory, it will get the crap off the Balance Sheet so that the Balance Sheet actually makes some sense.

Finally, I am not sure who these "rich bankers" are. The guys who ran the small investment operations that put an entire firm's capital at risk have mostly been fired. Most of the CEO's on whose watch this occurred have been fired.

The original Paulson plan says nothing about a reverse auction. It says Paulson gets $700 billion to use as he pleases and that there will be no oversight or review ever permitted.

If the treasury doesn't overpay, there is very little point to the bailout. The point is that these assets are worth much less than originally supposed, so much less that banks holding them can no longer cover their liabilities. Selling them at the market rate changes nothing. The plan only helps if the government overpays and gives the mortgage holders free money. Taxpayers ought not to give money to people implicated in creating this mess in return for nothing.

[Hungary Jack]

The Paulson plan is a fire sale. The types of toxic securities that Paulson proposes to buy will likely be bought for cents on the dollar. For example, about 6 months ago Merrill Lynch sold a bunch of securities to a private investor for about 21 cents on the dollar. Today's prices may likely be lower, and the Treasury is not proposing to buy all securities--only enough so that some sort of market is established for these things so that some reliable valuation may be attached to them.

The mechanism for purchasing these securities is a reverse auction. Outside of collusion among the firms trying to sell these securities, I don't see how the Paulson plan will "overpay" for bad loans.

The companies that bought these things have been punished pretty severely already by the stock market, and this bailout is not going to infuse them with tons of capital so that there stock price recovers. In theory, it will get the crap off the Balance Sheet so that the Balance Sheet actually makes some sense.

Finally, I am not sure who these "rich bankers" are. The guys who ran the small investment operations that put an entire firm's capital at risk have mostly been fired. Most of the CEO's on whose watch this occurred have been fired.

The original Paulson plan says nothing about a reverse auction. It says Paulson gets $700 billion to use as he pleases and that there will be no oversight or review ever permitted.

If the treasury doesn't overpay, there is very little point to the bailout. The point is that these assets are worth much less than originally supposed, so much less that banks holding them can no longer cover their liabilities. Selling them at the market rate changes nothing. The plan only helps if the government overpays and gives the mortgage holders free money. Taxpayers ought not to give money to people implicated in creating this mess in return for nothing.

Banks are undercapitalized and having trouble raising capital to make loans. A big part of the problem is that the securities they hold cannot be reliably valued because no one will buy them. The market is frozen. There is no doubt that the assets are far, far below book value. But until banks can bring some clarity to their balance sheets, they cannot raise additional capital and they are afraid to make loans.

The Paulson plan aims to liquidate some of these securities to provide some capital to banks that sell, but more importantly to establish prices that can help banks value the securities and state their assets and liabilities with some certainty. Then they might be in a position to raise more capital through equity or borrowing from other investors.

The government purchase is not necessarily a write-off. The Paulson will have the government buying illiquid, distressed securities. If economic conditions improve and the market recovers, these securities may regain their value in 2, 5, 10 years. No one really knows how it will play out. But time has shown that equity valuations and junk bond valuations can swing wildly as economic conditions change.

In short, the primary aim of the plan is not to have the government recapitalize banks by buying toxic securities at a huge loss to the taxpayer. The capital infusion will certainly help, but the bigger aim is to bring liquidity to a market for securities that no one will go near at this point in time.

[Arthur Dent]

In short, the primary aim of the plan is not to have the government recapitalize banks by buying toxic securities at a huge loss to the taxpayer. The capital infusion will certainly help, but the bigger aim is to bring liquidity to a market for securities that no one will go near at this point in time.

If the goal is to "establish prices", I think the $700 billion price tag is a little steep. In any case, it's pretty likely that if these assets were properly valued, it would show that banks are still broke. What good is that? The Fed has been busily accepting these junk assets as collateral for loans, so we're already providing liquidity for capital tied up in these securities. I'd also like a lot more than the chance that junk debt may not be in the end as worthless as whatever Paulson decides to pay in exchange for that kind of money.

[planet planet]

St. Louis based Wachovia Securities, primarily made up of the former AG Edwards, wasn't included in the Citigroup buyout. They plan to operate independently, but are a ripe target for another acquisition.

http://money.cnn.com/news/newsfeeds/art ... RTUNE5.htm

[Hungary Jack]

There should not be much doubt that we are experiencing the second huge correction in asset prices post bubble in a decade. The first was tech stocks. Now it is housing.

The housing boom was driven by incredibly lax monetary policy (by historical standards) post tech bubble / 911. In other words, cheap money prompted all types of investors to start bidding up property prices at unsustainable rates. There is evidence of this in every developed country.

So how will the economy fare in the wake of the housing price correction? It's hard to tell, but if debt-happy consumers were drawing on home equity to finance their consumption, we will have a bumpy ride for awhile. But increasing trade, investment in green technologies, and infrastructure spending could keep the economy float during these times.

This has to accompany the bailout as well as increased regulation, trade deficit equality etc. for anything positive to come from it.

Well, yes. Any economic growth that employs Americans in high-paying jobs and increases national income can help stabilize asset prices and lower mortgage defaults. If the government is going to own a bunch of these mortgages, then rising (or at least stable) asset prices are the best thing possible for Joe Taxpayer.

[Hungary Jack]

In short, the primary aim of the plan is not to have the government recapitalize banks by buying toxic securities at a huge loss to the taxpayer. The capital infusion will certainly help, but the bigger aim is to bring liquidity to a market for securities that no one will go near at this point in time.

If the goal is to "establish prices", I think the $700 billion price tag is a little steep. In any case, it's pretty likely that if these assets were properly valued, it would show that banks are still broke. What good is that? The Fed has been busily accepting these junk assets as collateral for loans, so we're already providing liquidity for capital tied up in these securities. I'd also like a lot more than the chance that junk debt may not be in the end as worthless as whatever Paulson decides to pay in exchange for that kind of money.

If the banks go broke en masse, then the FDIC has a mega mess on its hands, and the taxpayer will be funding emergency loans of hundreds of billions to keep insured banks solvent so bank customers don't freak out. Then the government will likely end up owning equity in a bunch of failed banks.

The de facto nationalization of AIG was enough for me too. But I'd rather see the government own securities that might recover in value if the alternative is to own a host of banks whose equity is worthless. The Treasury has gone this route by "encouraging" teetering banks to find buyers.