Questions about the bailout

Okay I’m still trying to get my arms around this whole bailout and I’m still not sure if it’s a good idea or not. Got a few questions for the smart folks on this board: 1. What price does the gov’t intend to pay for these securities (MBS)? I’ve heard the gov’t is going to buy the MBS through some kinda of auction (reverse auction?). Now, wouldn’t this force the companies that sell these assets into bankruptcy? Considering they now have to sell these assets at market value, which, by their own disdain for mark-to-market accounting, tells me that these assets are not strong enough to support their balance sheets. Thus, to prevent bankruptcy, won’t the gov’t will have to buy these assets at a price above their true market value? 2. The assets true worth. Back to the mark-to-market – I keep hearing pundits saying that these assets are worth more that they are currently trading at and, therefore, should NOT be booked at prices resulting from “fire sales.” Really? Okay, then why isn’t Buffet spending 5 bil on them? – he certainly can ride out the storm for the next few years. I mean if it’s really is a liquidity issue, shouldn’t PE guys come swarming in and picking these up at $0.15 (or whatever they’re trading at) on the dollar? Is the issue that the banks don’t want to sell these at what the market is pricing them at? Or, is it that market price doesn’t really reflect they’re true worth? 3. CDS (i.e., financial atom bombs) Is the bailout really meant to provide liquidity to the MBS market and, thereby, supporting the value of these assets on the various bank’s BSs? Or, is it out of fear that these MBS will default and the parties that wrote CDS on the MBS (I’m not even sure if this is happening) will not be able to pay their contra-party leading to an even greater market disruption? Yours truly, US Congress

"1. What price does the gov’t intend to pay for these securities (MBS)? " Well, under a reverse auction, firms would approach the Treasury with prices at which they (THE FIRM) want to sell the asset. Treasury will lift the lowest offer. If WAMU participates in this program, they’re done, BK, right then and there. I know what WAMU has on their books, and they are insolvent. "2. The assets true worth. " An argument can be made that some of the structured asset prices out in the marketplace are trading at below “fair” value. This is the result of de-leveraging in that there simply isn’t enough balance sheet out there to lift an offer. "3. CDS (i.e., financial atom bombs) " CDS are going to get their long overdue regulation. Transactions in these contracts are going to need to be exchange traded just like Futures. Initial margin and maintenance margin rules will apply. Is the bailout’s aim to improve liquidity? Sure, but it doesn’t solve the problem. The problem is an over-leveraged household balance sheet that has lived beyond its means for too long. Bernanke and Paulson are making the big assumption that banks are going to be willing to lend after they get much needed capital injections. When Japan had their real estate downturn and economic horror, the people were net savers, and all the money injected to the banks from the Japanese government didn’t spur lending. And this plan is supposed to work here in the U.S. , where the average Joe could barely keep his chin above water? I say no, and Joe is going to be a floater once taxpayer losses mount should this bill pass. Of course, Paulson and Bernanke are adamant that Congress pass this Bill with haste as the economy will crumble, but you have to understand that all will be ok after the economy endures a period of much needed pain. Expansion of credit is the heartbeat of Wall Street. It is what causes inflation, gets you to spend, gets you in more debt, and feeds the gormandizers on the Street. You better believe this is why Paulson and Bernanke and Co. are panicking. The last two generations in America hasn’t seen tough times. They will now.

Gremlin, Your last comment of point 3 seems to auger well for my having shorted the US greenback, I just hope you’re right. Willy

Gremlin, Well-written!!!

cfa_gremlin Wrote: ------------------------------------------------------- > "1. What price does the gov’t intend to pay for > these securities (MBS)? " > > Well, under a reverse auction, firms would > approach the Treasury with prices at which they > (THE FIRM) want to sell the asset. Treasury will > lift the lowest offer. If WAMU participates in > this program, they’re done, BK, right then and > there. I know what WAMU has on their books, and > they are insolvent. > I hope that they abandon this idea shortly. It’s really silly and doesn’t accomplish what they want. > "2. The assets true worth. " > > An argument can be made that some of the > structured asset prices out in the marketplace are > trading at below “fair” value. This is the result > of de-leveraging in that there simply isn’t enough > balance sheet out there to lift an offer. > Bernanke seems to believe in the “Held to Maturity” valuation. I guess Bernanke somehow believes that a security’s value has something to do with who owns it. Even a guy as smart as Bernanke is getting sucked into idiocy. > "3. CDS (i.e., financial atom bombs) " > > CDS are going to get their long overdue > regulation. Doubtful. They may regulate CDS exposure for regulated companies (like banks). > Transactions in these contracts are > going to need to be exchange traded just like > Futures. I agree. There might be an exchange, just like futures. And just like futures, I can step off the exchange anytime I want and do a swap or a forward and get rid of regulation. On just about anything traded in futures markets, there is a massive market that happens outside of futures markets. As with just abut everything in futures markets, there is a huge need for liquidity outside the market because of customized contracts/grades/delivery requirements/dates/sizes/ etc… > Initial margin and maintenance margin > rules will apply. These are about credit rules for the clearinghouse, not about laws about how you can trade futures underliers. > Is the bailout’s aim to improve > liquidity? Apparently. An interesting goal of govt. > Sure, but it doesn’t solve the > problem. The problem is an over-leveraged > household balance sheet that has lived beyond its > means for too long. Bernanke and Paulson are > making the big assumption that banks are going to > be willing to lend after they get much needed > capital injections. When Japan had their real > estate downturn and economic horror, the people > were net savers, and all the money injected to the > banks from the Japanese government didn’t spur > lending. And this plan is supposed to work here > in the U.S. , where the average Joe could barely > keep his chin above water? The relationships between the gov’t and banks and people and banks couldn’t be more different between the US and Japan. In particular, B&P can nearly force banks to lend money. > I say no, and Joe is > going to be a floater once taxpayer losses mount > should this bill pass. Of course, Paulson and > Bernanke are adamant that Congress pass this Bill > with haste as the economy will crumble, but you > have to understand that all will be ok after the > economy endures a period of much needed pain. Completely agree with that. > Expansion of credit is the heartbeat of Wall > Street. It is what causes inflation, gets you to > spend, gets you in more debt, and feeds the > gormandizers on the Street. You better believe > this is why Paulson and Bernanke and Co. are > panicking. > > The last two generations in America hasn’t seen > tough times. They will now. Yep…

JoeyDVivre Wrote: ------------------------------------------------------- > Bernanke seems to believe in the “Held to > Maturity” valuation. I guess Bernanke somehow > believes that a security’s value has something to > do with who owns it. Even a guy as smart as > Bernanke is getting sucked into idiocy. > listen up folks, this is a finance lesson in one paragraph. this is the nub of the whole field of valuation. if you were to stop visiting AF today, this is the paragraph i would note down and carry in my wallet for the rest of your life. ok, now that i’ve irritated/got your attention only thing i’d add is that the exception to this is when we’re talking of an operating asset where control matters to the future CFs. in that situation, there may be different values depending on who will run the ops. of course you can also argue that the op assets under A are a different asset altogether as the same under B’s control, in which case even the exception is explained away. see, even bernanke is a tool when it comes to valuation. we’ve exposed the bugger.

"> "3. CDS (i.e., financial atom bombs) " > > CDS are going to get their long overdue > regulation. Doubtful. They may regulate CDS exposure for regulated companies (like banks). " Joey - can u expand why this is doubtful? "In particular, B&P can nearly force banks to lend money. " Why haven’t they forced banks to lend money up to this point? Bernanke started urging banks to lend back in October 2007, but no dice. Difference between OIS and Libor keeps on ramping, a sign of an escalating liquidity squeeze.

rohufish Wrote: ------------------------------------------------------- > JoeyDVivre Wrote: > -------------------------------------------------- > ----- > > > Bernanke seems to believe in the “Held to > > Maturity” valuation. I guess Bernanke somehow > > believes that a security’s value has something > to > > do with who owns it. Even a guy as smart as > > Bernanke is getting sucked into idiocy. > > > > listen up folks, this is a finance lesson in one > paragraph. this is the nub of the whole field of > valuation. if you were to stop visiting AF today, > this is the paragraph i would note down and carry > in my wallet for the rest of your life. > > ok, now that i’ve irritated/got your attention > > only thing i’d add is that the exception to this > is when we’re talking of an operating asset where > control matters to the future CFs. in that > situation, there may be different values depending > on who will run the ops. of course you can also > argue that the op assets under A are a different > asset altogether as the same under B’s control, in > which case even the exception is explained away. > > see, even bernanke is a tool when it comes to > valuation. we’ve exposed the bugger. Yeah, because the liquidity value of an asset in a liquidity crunch is the “real” value of the asset. Personally, if I had the ability to buy up $700BN of this stuff, I’d do it in a heartbeat. if this goes through the government will make a killing on it.

cfa_gremlin Wrote: ------------------------------------------------------- > "> "3. CDS (i.e., financial atom bombs) " > > > > CDS are going to get their long overdue > > regulation. > > Doubtful. They may regulate CDS exposure for > regulated companies (like banks). " > > Joey - can u expand why this is doubtful? > Because the gov’t needs to allow OTC derivatives because people have unusual risks that they need to hedge. Every asset class out there allows for OTC derivative transactions that are unregulated. The gov’t regulates these by things like anti-fraud laws, civil procedures, a web of rules on things like “sophisticated clients”, and so on. CDS is especially nicely self-regulating because credit concerns limits the players. > "In particular, B&P can nearly force banks to lend > money. " > > Why haven’t they forced banks to lend money up to > this point? Bernanke started urging banks to lend > back in October 2007, but no dice. Difference > between OIS and Libor keeps on ramping, a sign of > an escalating liquidity squeeze. If your balance sheet suggests you have no capital, nobody can force you to lend money. I guess in a sense this is similar to the Japanese situation in which Japanese banks were holding tons of real estate investments that was impossible to value so they were reluctant to lend money. Maybe this is more similar than I first thought. Instead of direct real estate investment, we have CDS exposure on mezzanine tranches of CDO’s comprised of Alt-A mortgages on depreciated real estate. The latter sure sounds more complicated.

spierce Wrote: ------------------------------------------------------- > rohufish Wrote: > -------------------------------------------------- > ----- > > JoeyDVivre Wrote: > > > -------------------------------------------------- > > > ----- > > > > > Bernanke seems to believe in the “Held to > > > Maturity” valuation. I guess Bernanke > somehow > > > believes that a security’s value has > something > > to > > > do with who owns it. Even a guy as smart as > > > Bernanke is getting sucked into idiocy. > > > > > > > listen up folks, this is a finance lesson in > one > > paragraph. this is the nub of the whole field > of > > valuation. if you were to stop visiting AF > today, > > this is the paragraph i would note down and > carry > > in my wallet for the rest of your life. > > > > ok, now that i’ve irritated/got your attention > > > > only thing i’d add is that the exception to > this > > is when we’re talking of an operating asset > where > > control matters to the future CFs. in that > > situation, there may be different values > depending > > on who will run the ops. of course you can also > > argue that the op assets under A are a > different > > asset altogether as the same under B’s control, > in > > which case even the exception is explained > away. > > > > see, even bernanke is a tool when it comes to > > valuation. we’ve exposed the bugger. > > Yeah, because the liquidity value of an asset in a > liquidity crunch is the “real” value of the > asset. > > Personally, if I had the ability to buy up $700BN > of this stuff, I’d do it in a heartbeat. if this > goes through the government will make a killing on > it. Why don’t you buy some of it? The market is looking for you to do that…

On the question of what the assets are worth: At the morning meeting this morning many of my collegues were putting forth the argument that there is some sort of “liquidity discount” embedded in the current price of these “securities” since everyone is hording cash and unwilling to buy them. They contend that a government bid will remove this discount and remove an impediment to get this market functioning again. I couldn’t agree less. My simplistic view is that in order for this plan to relieve pressure on financial insitutions, the government will have to significantly overpay for these assets. Now, you can call that using HTM pricing if you want, but the bottom line is there is no free lunch in this thing, someone is going to absorb the losses. Perhaps you can argue that the government’s “infinite” time horizon means they can wait for home prices to turn around. But what about those tranches that are permanently impaired because the default have already hit and the modeling assumptions used initially were based on another dimension of space-time, are those securities not priced fairly right now? What price will Uncle Sam pay for those? At the end of the day, the government is trying to artificially inflate asset prices by providing a “phantom bid”, this to me seems doomed to failure.

JoeyDVivre Wrote: ------------------------------------------------------- > spierce Wrote: > -------------------------------------------------- > ----- > > rohufish Wrote: > > > -------------------------------------------------- > > > ----- > > > JoeyDVivre Wrote: > > > > > > -------------------------------------------------- > > > > > > ----- > > > > > > > Bernanke seems to believe in the “Held to > > > > Maturity” valuation. I guess Bernanke > > somehow > > > > believes that a security’s value has > > something > > > to > > > > do with who owns it. Even a guy as smart > as > > > > Bernanke is getting sucked into idiocy. > > > > > > > > > > listen up folks, this is a finance lesson in > > one > > > paragraph. this is the nub of the whole field > > of > > > valuation. if you were to stop visiting AF > > today, > > > this is the paragraph i would note down and > > carry > > > in my wallet for the rest of your life. > > > > > > ok, now that i’ve irritated/got your > attention > > > > > > only thing i’d add is that the exception to > > this > > > is when we’re talking of an operating asset > > where > > > control matters to the future CFs. in that > > > situation, there may be different values > > depending > > > on who will run the ops. of course you can > also > > > argue that the op assets under A are a > > different > > > asset altogether as the same under B’s > control, > > in > > > which case even the exception is explained > > away. > > > > > > see, even bernanke is a tool when it comes to > > > valuation. we’ve exposed the bugger. > > > > Yeah, because the liquidity value of an asset in > a > > liquidity crunch is the “real” value of the > > asset. > > > > Personally, if I had the ability to buy up > $700BN > > of this stuff, I’d do it in a heartbeat. if > this > > goes through the government will make a killing > on > > it. > > > Why don’t you buy some of it? The market is > looking for you to do that… 1. You need scale, considering the bonds are usually issued at a min of 100k. 2. Indivs can’t buy a lot of it. 3. A lot of people are doing that right now. Problem is, most banks won’t sell at those rates unless they absolutely have to, making the problem worse.

> 3. A lot of people are doing that right now. > Problem is, most banks won’t sell at those rates > unless they absolutely have to, making the problem > worse. This is what I’ve been wondering. If this is the case, then maybe the firms should price these things at HTM. So the disconnect is the spread between what the banks will sell for and what the market will pay (is that really a liquidity issue???). I’m starting to the think that the market is demanding fire sale prices because of the overall stress that the banks are under. In that case, maybe the gov’t should go in and buy these at a “fair” price (somewhere between what the mkt is demanding and what their acct value is).

TJR Wrote: ------------------------------------------------------- > > 3. A lot of people are doing that right now. > > Problem is, most banks won’t sell at those > rates > > unless they absolutely have to, making the > problem > > worse. > > > This is what I’ve been wondering. If this is the > case, then maybe the firms should price these > things at HTM. > > So the disconnect is the spread between what the > banks will sell for and what the market will pay > (is that really a liquidity issue???). I’m > starting to the think that the market is demanding > fire sale prices because of the overall stress > that the banks are under. In that case, maybe the > gov’t should go in and buy these at a “fair” price > (somewhere between what the mkt is demanding and > what their acct value is). It is a liquidity issue, in that, the premium demanded between the market clearing price and the HTM price, is a liquidity price. There is a lack of investors that’ll buy this at a higher price, those that are buying are doing so at a very steep discount. The biggest problem is that banks won’t sell unless they have to. When one does sell it harms them all, reducing capital positions, resulting in more forced sales, depressing the price further. As capital positions are reduced, any money lent through Fed facilities is used to shore up capital positions, rather than re-lending. The whole system is constipated. The Fed/Treasury are proposing a heavy dose of Exlax.

" In that case, maybe the gov’t should go in and buy these at a “fair” price (somewhere between what the mkt is demanding and what their acct value is)." TJR - the problem is that the “fair” price is dependent on the amount of leverage in the system. These fire-sale prices are not only found in structured assets such as MBS, ABS, Credit Card Loans etc, but also in Corporate bonds, High Yield bonds, and Emerging Market bonds. Bernanke calls these prices “fire-sale” because he believes that the amount of leverage in the system can be increased to a level that supports his “fair” price, whatever that may be. He’s saying that prices are not in equilibrium because there is too much supply out there and not enough demand. This is true, but I think he’s out of his mind to think that the pace of credit growth will return to a level that will bring prices to “fair” valuation. I think this is impossible without printing money. When debt service exceeds income the game is over. This is why I believe deflation is unavoidable and that very hard times are ahead.

cfa_gremlin Wrote: ------------------------------------------------------- > " In that case, maybe the gov’t should go in and > buy these at a “fair” price (somewhere between > what the mkt is demanding and what their acct > value is)." > > TJR - the problem is that the “fair” price is > dependent on the amount of leverage in the system. > These fire-sale prices are not only found in > structured assets such as MBS, ABS, Credit Card > Loans etc, but also in Corporate bonds, High Yield > bonds, and Emerging Market bonds. Bernanke calls > these prices “fire-sale” because he believes that > the amount of leverage in the system can be > increased to a level that supports his “fair” > price, whatever that may be. He’s saying that > prices are not in equilibrium because there is too > much supply out there and not enough demand. > This is true, but I think he’s out of his mind to > think that the pace of credit growth will return > to a level that will bring prices to “fair” > valuation. I think this is impossible without > printing money. When debt service exceeds income > the game is over. This is why I believe deflation > is unavoidable and that very hard times are ahead. That is exactly right and pretty much the point I was making to my group this morning–there is no free lunch! We are in a period of severe discredit and captial flows are not going to magically bounce back to levels of the past anytime soon.

So I called my broker awhile ago and told him I wanted to short some MSFT at the HTM price. He said he could do it at 25.80. I told him that my understanding was that the HTM price was 30% higher than that. He’s checking with the boss to see if they can do that trade for me. I don’t know why he hasn’t called me back.

JoeyDVivre Wrote: ------------------------------------------------------- > So I called my broker awhile ago and told him I > wanted to short some MSFT at the HTM price. He > said he could do it at 25.80. I told him that my > understanding was that the HTM price was 30% > higher than that. He’s checking with the boss to > see if they can do that trade for me. I don’t > know why he hasn’t called me back. lol!! bad :frowning: