The Rescue

The illusion of american capitalism.

 

I disagree - if you wait 4 months, half of Wall Street may no longer exist. I also trust Henry Paulson probably more than anyone else to put this together. To Bush's credit, he's pretty much stayed hands off. Both sides have shown a willingness to compromise - that's when things get done. If the election is ugly or anything like that, Congress may not be in that mood in January.

I believe the last two bailouts of this magnitude (RTC and the 1930's one) both netted profits for the government. BSC likely also will, and if this is done properly, it should do so as well because this crisis is being caused by short-term valuations of this crap rather than long-term valuations of it. The government has the resources to take more of a long-term view.

 

its amazing how much compromise you get when a crisis is on hand. its a shame it takes something like this to end partisan bs

that being said, 9-11 brought us homeland security, and patriot acts, and things of that nature. its a double edged sword, something has to be done now, but we have a two party system for healthy debate. i think rimrockers point is that the short term solution is forced upon us, a taxpayer bail out, but the longer term solution, how to avoid further crap, may never come.

 

So, what (in theory) would have happened without the bailouts?

 

runs on banks, banks failing, people losing money. quite simple.

 

they were discussing bail outs on cnbc yesterday, a panel of about five, and one person made the point that the underlying issue, bad loans are still floating out there.

I don't know if that is the point you were making but it is not being addressed

 

I agree that a lot of what was going on is unsustainable. But the firms that would be taken down over that period would include a whole bunch of firms that really didn't mess up - and would just be collateral damage. The MS and GS situations are examples of this. By all accounts, they are well run and had no real problems. But because of circumstances with other banks, they were being sucked in. And the accounting rules make it such that the problem will snowball. Once you're pulled down, you have to raise capital. But you can't sell equity because your equity is in a downward spiral, and you can't raise debt because people think you might go bankrupt. Thus, if you can't raise capital, your debt ratings go down, and bankruptcy becomes a reality. It's just a downward spiral based on nothing but fear. You don't want to take those firms down and destroy decades of value for no good reason.

The ones that have fundamental problems will get destroyed regardless. It was the other firms that needed to be saved.

I cound be wrong on this, but I think the problem here is that the valuations already take this into account - and far more. From my understanding, this stuff has already been written down well beyond what is most likely to happen because of new account rules that require it. A few months ago, they were talking about a wave of write-ups that will eventually happen at some point when things stabilize. I think to have these be the realistic valuations of this stuff, the world has to go to hell - possible, but not probable.

 

funny i've mentioned this before on here, sort of in the same discussion. my brother and uncle were discussing the lack of innovation and engineers and such compared to countries like China etc. and of course my uncle being older was the more concerned.

my brother's argument was that all of our brightest students have been pushed to wall street because they realize they can make more money managing money than even in technical industries. I thought my brother's point was correct and I thought nothing was wrong but your theory is interesting as well.

 

This. I think the crap hit the fan in Washington when they heard that a Chinese state-controlled fund was bidding to buy a majority stake (49%) in Morgan Stanley. Morgan Stanley, the pride and joy of our nation's financial system. In the hands of the Chinese government. Oh hell no.

What the hedge funds and these other institutions was the equivalent of financial terrorism. It's the only way you explain how a company comes out with earnings that completely shatter expectations, and yet within 24 hours naked short-sellers wipe out 40% of its market value and nearly force it into the waiting arms of the Chinese. It was out of control. This had to be done.

 

I've heard from friends today that the carnage among hedge funds from this month of sh-t is going to be absolutely massive, shorting notwithstandingg, because all of their hedges crapped out and today the short ban hurt them. And soon their investors are going to come knock-knock-knockng which is going to result in more sales......

 

You mean more short-covering. Brilliant.

What the government did today was take the bears out to the back, slaughter and mince them to pieces.

 

A couple of things here. First, I think the way it's profitable for the gov't is that they have a longer term time horizon. They can do things Wall Street can't, because they can afford to hold on to this crap for 5 or 10 years without it preventing them from conducting other business. For a Wall Street firm to do it, they'd basically have to shut down all their other business in the meantime. One person on CNBC basically called it the government becoming the world's largest hedge fund, and it may be the greatest trade in history. Who knows, but it does seem like if it's done properly, it should be at least revenue neutral, if not profitable.

The other thing is what the consequences would have been. Here's an article on how the meeting with treasury went - they were basically talking about the complete collapse of western economics within days. The pain would have been far worse than a trillion dollars.

http://www.nytimes.com/2008/09/20/washington/19cnd-cong.html?_r=1

To their credit, Bush, Pelosi, and Reid have basically all stayed out of this. All have essentially admitted they have no clue what the hell is going on, and they are letting the Treasury and Fed figure it out. And frankly, there aren't many people out there better suited to address the problem than Paulson and Bernanke. The emergency nature of this has gotten everyone to work together and listen to the experts. The post-9/11 stuff was all political - it was politicians drafting bad legislation. Here, you have real experts doing it, and the politicians staying out of the way. If you did this in January, you'd probably have the politicians meddling to get their favorite solutions in it, and that would be a disaster.

 

And that, friends, is why firemen are not asked to be the Secretary of the Treasury

 

But profitability has nothing to do with housing prices. It simply has to do with default rates. Both the previous bailouts were profitable in similar circumstances.

That may be - but as of yet, the politicians have completely stayed out of the way. This is government functioning at its best.

The collapse of western economics within days seemed like a pretty good rationale to me? You're also preventing the collapse of pension funds, retirement accounts, etc.

You haven't given any evidence that its NOT the best way either, though. I think preventing complete collapse of the economy is a pretty good use of the money, especially given that it will have a net cost of probably zero, maybe profitable, and certainly nowhere near a trillion dollars. The only way it would get close to a trillion dollars net is if every single potentially bad mortgage in the country defaults - the chances of that happening are zero.

It's not like the government is just buying up and throwing away potentially bad debt - they are buying it at a discount and will collect a good chunk of it. Wall Street can't do it because of accounting rules and reserve requirements that the government doesn't have to worry about.

But that's not at all how this will play out. The people that profited aren't walking off free and clear and we won't be stuck with a trillion in debt.

 

I actually think this will be profitable, but it all depends on how much the government pays for these instruments. Of course, we are going to take the hit in the short-term.

I believe the RTC actually made money. It would have made a lot more if it had good management.

As I see it, a part of the problem is the mark-to-market accounting rules. That rule forces financial institutions to take a short-term view instead of investing for the long-term. Since no one wants to own these packaged loans, they have no value, which leads the owners to have to dramatically lower the value, which leads to liquidity problems, which leads to the need to sell assets, which leads to even lower values, etc. I have thought for months that the person to make real money out of this deal is the person who can buy all of these loans (at firesale prices, of course) and hold them to maturity. Of course, there will be defaults, but if you are paying pennies on the dollar, that is no big deal.

I started practicing law in 1993 and I remember having several cases with the bottom dweller entities that bought claims from the FDIC, FSLIC, and RTC. Those companies were always willing to cut quick deals at small amounts because they paid so little to buy the debt.

If the RTC part deux buys the all of these instruments at a fair price, holds the notes to maturity, and negotiates fairly with the defaulters, it could make a good amount of money over time. Of course, since our federal government is involved that will probably not happen.