Tuesday, September 23, 2008

Even MORE on the Bailout

RedState's Cianfrocca has an overview worth reading.

Does Mr. Paulson intend to systematically purchase MBS at higher prices than current market values would suggest?

This would save Wall Street’s bacon. A great many firms would be relieved of the burden of their past errors and mismanagement, and would get a fighting chance to stay in business and attract new capital.

Is that fair and right? No, it’s not. It would also put the taxpayers in a position to absorb Wall Street’s losses, through higher taxes, higher inflation, or both. (Politically, of course, this is dynamite.)

Got that? Purchasing at par (100% of face-value) is not fair and endangers taxpayers to some (yet-to-be-determined) degree.

What if he means to value his MBS purchases fairly, or to undervalue them? That will force the pain to be borne by the firms that made the bad decisions and took too much risk.

Is that fair and right? Yes, it is. But it will also force many of these firms out of business. And that would have severe follow-on effects in world markets, as a cascade of liquidations cause asset values to collapse across the world.

More than one analyst has suggested that we could see a 25% drop in the US stock market, or worse.

That's the alternative. Purchase them at some "fair" price (say, e.g., a discount of 20% from par) and there's a significant liquidity crisis. What he does NOT say is that this will have a serious impact on day-to-day credit markets.

His conclusion:

We need to perform the purchases of MBS either at a fair valuation or at an undervaluation. Because, as with the Resolution Trust Corporation, that will give the authorities time to control the process and work everything out carefully, perhaps over the next two years.

The time element is extremely important. The actual values of the CDOs ("loan lumps") will not be known for at least a couple of years, maybe 5 to 10 years. Treasury can always assign penalties (or rewards) later.

What about The Objectors, like BillyBoyKristol, Limbaugh, Newt, Barney, Dodd, et al?

Instead, the perception is growing in financial markets that the deal will die in Congress. The culprits: Republicans who are dead-set against a bailout on principle, and Democrats who are seeing a chance to jump-start their plans for the government to take over the economy and run it in a corrupt way

Like it or not, his assessments of the politicians is dead-on. Who loses big-time if the deal does NOT go through?

If there’s no deal, there’s no upside for Republicans

I agree with him there. If the Republicans liked FDR's regime, they will LOVE Obama's.

Members of Congress in both parties: Get your heads out of your lower intestinal tracts and do the people’s business for a change

I know. It will be hard to get out of your habits...

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