Here's what pisses me off about the bail out. Likely most of the people that benefits from the bailout are the same people that rails against any other sort of social welfare (based on the assumption that people that were in the financial industry are fairly wealthy which usually correlates with conservativism), claiming that people need do things by themselves and that environment and such wouldn't step in the way if there's real desire and drive. Now that the crap hits the fan, everyone's a socialist?
This is a good summary of how it all works. rimrocker - take this as an example. Let's say there's $1 of debt the government is going to take over. They'll pay the originating firm $0.25 (just an example). So the firm that took the stupid risk is locking in a 75% loss - they aren't coming out good. But they are getting $0.25 to then go make a better, more stable loan with. The government now has paid $0.25 for this potential $1 revenue stream. If they hold it to maturity and the loanee doesn't default, the government made $0.75 on their $0.25 investment - a 300% return. If the government gets a quarter of the loan paid before it defaults, they break even. This is the risk-reward. The government has the resources to wait it out as things get better - Wall Street firms don't because of what Pushkin posted. (this doesn't account for time value of money, which will erode some of the returns, but it's a general sense of the way it works)
Here's the proposal... http://calculatedrisk.blogspot.com/2008/09/bailout-proposal.html As I expected, all bail out and nothing about reform or regulation.
You left out the part about the government itself having to borrow money for that .25, in order to eat all this bad debt.
We all know that it's going to initially cost a lot - that's the initial cost $700B to $1T people are talking about. We're discussing the long-term profitability of it and how it very well could pay for itself in the end.
I think that was part of the aspect of politicians staying out of it. They all agreed to make this super-clean legislation of what is necessary to get this thing started. Then the regulation (which will have more people with different opinions) and other legislative changes will all take place in the non-crisis environment.
I seriously doubt they will make money on it. They are buying it for .25-.70 cents on the dollar because that's exactly how much these things are worth. If anything, their value will keep going down. Foreclosures are still going up, the economy is slowing, people are saddled with other debt (ie credit cards). I dont see how the value of these securities will go up. If there was a chance, I think somebody would have bought them already.
Will it all pay for itself? The problem is that the assets being bought are a bunch of derivative intstruments that nobody really understands how to value. THat's a dicey proposition.
I agree, though the people who profited were also all the people who bought homes at the beginning or middle stages of the housing bubble. They were able to get mortgages at very low interest rates and then own houses with significantly higher value. Of course, if you bought a house recently, you might be screwed. That said, the government will be eating a lot of debt. Maybe the government should take everyones credit card and auto debt? Where does it end?
Of course. And like I said, we'll get the bail-out pushed through and then the same people this helps keep from ending up in soup kitchens will be the first to lobby hard against any suggestion of new regulations or checks because they will have learned their lessons. If we follow the course we're on now, we'll do nothing but spend $1,000,000,000,000 for nothing.
But all of those things are already accounted for in their valuation. Everything that is known about the market is already included in how these things are valued. But as Pushkin noted, they are valued as though you had to sell it right now. It's done using an artificially shortened time horizon and valued fairly conservatively. The government will also likely have flexibility to modify restructure loans to decrease likelihood of default in ways that Wall Street currently doesn't have. For example, if someone has a $100,000 loan that the government buys for $25,000, they could conceivably turn it into a $25,000 loan and cut people's payments by 75% to avoid default - and not lose a penny. This assumes an efficient, transparent market - which is exactly the problem right now. We aren't valuing assets efficienctly because of what Pushkin talked about. Due to fear, people don't want to get stuck with those illiquid assets right now, and that drives their value down, causing more liquidity issues. If you have irrational fear, valuations of things don't really correspond to fundamentals.
Mark-to-market is not an artifically short time horizon. It is the value of the security right now considering everything, including future revenue from the security. A derivative instrument for 2010 is not valued like an instrument that expires tomorrow. I dont think there was anything stopping Wall Street from doing that. Do we know these valuations aren't rational? The housing bubble was the biggest bubble in the history of man. There was a massive amount of leverage involved. The people who are supposed to make payments on these mortgages are saddled with credit card debt and face an increasinly slowing economy. These securities are pretty much worthless and just need to be written off. The banks don't want to write them off because they can't raise enough captial to keep up with the losses. The Treasury should buy them for $.02 on the dollar, kind of like the $2 Bear deal.
You don't think it's appropriate to mention that interest will have to be paid on this 700 billion+ dollar debt, with regard to the assets purchased being profitable?
LOL! Its called risk analysis I worked in this area for a few years. You can find out what anything is worth with enough information and computing power.
