The United Socialist States of America

This sucks.  Just two days after Congress listened to their constituents and voted against the bailout plan, the Senate has approved an even bigger bailout by tacking on $110 billion in random tax breaks.  This will now be an $810 billion bailout plan!

Now there is all sorts of pressure on Congress to vote to approve the “modified” plan.  All they did was add more to it!  This is supposed to appease the small government  Republicans?

And still, how is throwing $700 billion at this mess, after the government has ALREADY spent $700 billion going to solve the problem?

A big reason for the “crisis” we’re in is people defaulting on their mortgages.  Since they are defaulting, the “toxic mortgage backed assets” have become illiquid and stuck on financial institutions’ balance sheets.

What this bailout will do is get these toxic and worthless assets off of banks’ books and onto the Federal Governments.  People will still keep losing their homes and jobs.  All this will do is help Wall Street return to the usual business while the rest of us suffer.

Also, with the way the Feds will buy these securities, they are going to overpay handsomely for them.  If they paid the true value, they would be able to get these for free, since, they are in all likelihood, worthless.

In the reverse auction system, the Feds will say, “we have $50 billion available, what will you sell us for that amount.”  Banks will try to inflate the value of their holdings and not liquidate all of them.  Then the government will pay much more for them then they’re worth.  This will then allow other banks to mark their securities at that value.  This will give a worthless asset a price, and then set the market artificially high for them!  This makes absolutely NO sense!

If the Feds forced these companies to do a true auction, the value of these securities would be found.  Banks should say, “we have x and y securities, bidding starts at $100 million.”  If someone wants them, they can bid on them, whether it’s the Federal Government, Foreign Governments or private investors.  They will then bid the price up to the true value.  If nobody wants them, they can cut the price until they sell.  There will be a market for these.  It’s just that it’s going to be for pennies on the dollar.

What effect this will have on the banks, I have no idea.  I’m not an economist.  I guess it will cause some to fail, but at least they would have cleaner balance sheets.  Even if they had to take huge losses, other institutions would be able to buy them or loan them money to start back up.

What I do know, is that throwing money at this hasn’t helped yet, and probably won’t work tomorrow, or the next day.

It just sucks that it’s looking more and more like a foregone conclusion.  They were even talking about ways to go around Congress on CNBC the other day.  What a joke!  Let’s just hand over all the power to the Feds and live in a dictatorship!


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One Response to “The United Socialist States of America”

  1. Sonic Charmer Says:

    I’m with you. In fact, the only respect I disagree with you is one which makes the bailout seem an even worse idea. Namely, it’s not clear to me that Treasury will overpay and it’s not clear to me that the reverse auction will allow other banks to write up values. After all, a reverse auction is still an auction. If banks are so desperate to rid their balance sheets of this stuff then you’d think they’d bid the price down down down. And the ‘winning’ price is the lowest. I mean, isn’t that how a reverse auction work?

    So I can’t figure out how Paulson will hold a reverse auction AND pay an inflated/hold-to-maturity price at the same time. Unless he plans to rig the auction? Or let banks rig it?

    Because otherwise, I think the likely outcome of the reverse auction will be a flood of writedowns. Once bond X is sold to Treasury for price P, then all other banks will have to write down that bond (and probably, similar bonds) to the same price.

    And again, unless the reverse auction is conducted dishonestly, the winning price P of a reverse auction is going to be lower than most banks’ current marks, not higher. So the idea as sold to us makes no sense from the start. Unless Paulson has been lying about the plan to use a reverse auction in the first place.

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