There are those who say we shouldn’t worry about the $700 billion price tag on this bailout- after all it could end up being a money maker for the American taxpayer. PIMCO’s Bill Gross is one of these optimists:
NEW YORK, Sept 21 (Reuters) – Pimco’s Bill Gross said on Sunday the U.S. government could make money from its $700 billion proposal to buy bad mortgages from banks in a bid to contain the credit crisis.
The federal government "stands a good chance of making a profit" from the plan, Gross, the chief investment officer of Pacific Investment Management Co. (Pimco), told CNN television.
Here’s a hint though at what taxpayers are liable to be paying for these assets:
All of a sudden mortgage backed securities are looking more expensive:
Troubled residential and commercial mortgage assets are posting their biggest rallies in months on expectations the U.S. Treasury’s plan to relieve financial institutions of beaten-down assets will help find the elusive floor for nearly $8 trillion in assets.
"The government has stepped up to its role as ‘capital provider of last resort’," JPMorgan Chase & Co. strategist Christopher Flanagan said in a client note. "Asset price erosion due to inadequate capital availability, in the face of extraordinary fundamental value in many instances, is now largely off the table."
The top "AAA" slice of the ABX 07-1 index rocketed higher by nearly 8 points on Monday, [graph is 07-02] doubling the move from Friday and erasing at least three months of losses. Lower-rated subprime bond indexes bumping close to zero in recent months jumped by 1/2 point to more than 2 points.
So what does this mean for the taxpayer?
As the government weighs how to bail out the financial sector, the plan’s engineers face a dilemma.
The higher the prices the government pays for troubled mortgage securities held by banks, the more the rescue will bolster those banks and sustain the lending that is vital to the broader economy. But higher prices would also mean a worse deal for taxpayers.
In other words, the more effective the plan, the more expensive it will ultimately be.
Under both the Bush administration’s proposal and many of the variations finding favor among Democrats, the government would buy up to $700 billion in shaky assets now on the books of financial companies. As the government does so, it will be forced to grapple with the same question that has vexed the brightest minds on Wall Street for more than a year: What are the darn things worth?
Whatever the dollar amount, the value just changed from "What the market will bear," to "What a sucker’s willing to pay." Suckers don’t make money on their purchases- they overpay and lose their shirt.
Or in other terms, all this spin coming from The Street and Bush Co. is like putting lipstick on a pig…
Seriously, I call shenanigans. If the federal government ’stands a good chance of making a profit’, then why would a purely for-profit entity try to get rid of something that ’stands a good chance of making a profit’? I know the answer, but this spin just makes me sick. It makes me sicker that the uneducated populace in America will eat it up. :/
Anti-spam word: Gloom
Assemblyronin-
Worse than the economic implications to me are the constitutional issues. Even if the Dems manage to get judicial review back in the plan [I never in my life thought that I would be giving thanks for Shumer, Dodd and Frank!"] the implications for this power grab horrify me.
The Founding Fathers put up with a lot of economic distress in the name of freedom. I worry we are surrendering that freedom in the name of protecting our McMansions. Then to add insult to injury- it won’t work.
Not picking on anybody, but regardless of the near-term direction of home prices (obviously most of us agree it’s south), when you realize those mortgages are trading at about 50% of face, it may be a stretch to say that they are overvalued. The new 800-pound gorilla in the room quite apparently (to me) accounts for the most recent uptick, butI think it’s possible these pigs were a little oversold on the downside.
Loving this debate on valuation, method and scope in the Senate Banking Committee, btw.
I don’t think you’re seeing this bailout (handout) legislation in the proper historical perspective.
You should refer to it as an enabling act. It’s rather like the one Hitler sought, except that it suspends economic rights, rather than civil rights.
You haven’t reported on whether the clause denying court reviewability, is Constitutional, or whether questions have been raised about it. It’s pretty clearly unconstitutional, because it abolishes due process with respect to actions taken under it.
However, the fact that the clause is in the legislation, shows that it is a Hitler-style enabling act.
By the way, enabling acts of this sort usually do NOT get approved as long as democracy is the form of government. It is only when democratic government is suspended, that enabling acts get passed.
So, what this means is that we are facing a political crisis, which is what I predicted.
Once this fails to pass, you will see the powers square off politically.
Only when the on-the-street economy collapses will Joe Suburbanite realize that the political structure has been destroyed. Right now suburbia is still driving its cars, using its credit cards, trudging to its meaningless employment, and watching its cryptofascist TV shows.
Who’d want to bail out scum like that?
jryskmpr -
Have you seen CBC’s The Border?
twist -
I presume this guy hasn’t seen our H.4.1 charts
“Financial Crisis: Capitalism is not dead yet, but Anglo-Saxon finance is looking weak: Measures taken to deal with last week’s devastating financial falls may only be storing more trouble”, by Dan Roberts, Telegraph, September 23, 2008.
agnostic #3
This may be true for the 1st mortgage debt – the problem is the bailout will include credit card debt, student loans, car loans, etc. The bailout plan is to “clear the pipelines” of bad debt. It could very well be the mortgage part is something of a canard – the problem that is getting the headlines. Come to think of it, maybe this is where all those HELOCs will end up.
HELOC
FDIC Chief wants home loans part of bailout plan
Tuesday September 23, 2:37 pm ET
By Marcy Gordon, AP Business Writer
FDIC Chief Bair wants home loans part of $700 billion bailout plan; says banks holding up well
http://biz.yahoo.com/ap/080923/financial_crisis_fdic.html
jrskmpr-
Having the nation broke doesn’t scare me near as badly as this.
I’ve been watching Paulson- his answers aren’t good enough for me. I hope they aren’t good enough for Congress.
Igor says “bankrupt”. It’s hard to know if he means morally or financially.
John- #5
Maybe that’s next weeks panic- when they pass this $700B “pig-in-a-poke” and can’t find the funding for it.
I miss the old days [like a couple of weeks ago] when our primary focus around here was housing. Unfortunately, until we know how badly Washington bungles this one, it’s hard to know how housing will go.
SANDTOPPINGMIX -
You’re right, and I’m opposed to creation of a blind pool creation in the name of expediency. At the end of the day, though, everybody either believes in reliquifying the current system or replacing it with a different system, with its attendant infrastructure and regulatory delays and discoveries.
Personally, I don’t see what’s wrong with letting stupid bankers drown in their own idiocy, but if the government doesn’t get ahead of the curve, we will see the mother of all bank runs – the money market funds which have broken the buck so far are the tip of the iceberg. As was noted on CNBC last week when Steve Liesman or somebody put up the pictures of the lines outside the banks in 1930 or whenever, those lines are what the current proposed legislation is trying to avoid. As has also been pointed out, the real economy is also being affected as uncertainty reigns; the cabal to get “blank check” legislation passed is occurring because the government NEEDS a sense of normalcy restored to the real economy, and that first requires a sense of confidence in the credit markets.
SANTTOPPINGMIX (#7) -
Igor jailed your comment — must have thought it was another Nigeria-scam style money demand
I’m going to repeat that amazing subtitle in letters of fire: FDIC Chief Bair wants home loans part of $700 billion bailout plan; says banks holding up well
agnostic (#10) -
In similar circumstances, January 1933 saw the rise of two bold and innovative fiscal/political regimes that eventually managed to restore confidence in their constituents and get their economies moving again. One was even generally approved of by America’s senior business leaders.
jryskmpr
speaking about usurpation of power, fascism etc. check this:
Link
http://www.oftwominds.com/blogsept08/US-fascism9-08.html
John (#12) -
Well, which is it? The bailout package gets voted through, are we a communist society or fascist? Unless the equivalent of the S.S. or S.A. are sleeping in cars outside senators and congressmen’s homes, this doesn’t exactly sport the trappings of a fascist trend, IMO (current administration foreign policy ventures notwithstanding).