What does bailout really mean?

Aside from high taxes, what should we expect going forward? How should I explain this to friends of mine who lay carpet for a living?

Explain to your friends that they need to really be attentive to their work, because there will soon be a huge influx of CFA charterholders competing for carpet-laying jobs.

High taxes is by not means a guarantee… The $700B will be used to purchase mortage securities for pennies on the dollar. These assets will then be sold to institutional investors or can be held for an extended period for valuations to bounce back. What people don’t get is that the proceeds from these sales will then be used to PAY BACK the $700B. If done correctly, there may be a significant amout left over as well, so tax payers could potentially come out ahead. The main point here is that the $700B will not just vanish into thin air.

Actually I don’t think this is technically a “bailout” - treasury stands to make a tidy profit out of all this. It is not like the trust will buy assets at PAR. They will be purchased at steep discounts, often lower than the implied cash flow characteristics. We shall see how it all shakes out, but the treasury is not simply writing a check. In the near term we will see a progressively weakening dollar but in the mid-term, markets will recover and the dollar will strengthen.

Treasury will presumably need to take ALL ABSs a company offers at their price, or else they have a lot of adverse selection problems. If they pay 40 cents on the dollar, and banks only give the treasury the assets they expect to fail, then the government loses money and we have to wait for the next freeze-up and bail again. In the short term, this could be funded by taxpayer money or by floating more debt. If the assets are likely to perform well over the long term, debt is probably more politically palatable and faster to implement. However, this may cause near-term inflation which will reduce peoples’ purchasing power much as a tax would. Over the long term, however, this plan doesn’t look so damaging as - say - a $700 billion dollar war, or other things that the administration likes to do.

We are still 1SD away from "normalized home prices in this country, which implies about an other 20% down from here. I doubt that the Government will make anything at all on these assets, since by defualt, in order for the participation rate to be high, they will have to grossly overpay for the junk paper.

Thanks guys. So this really is a necessity rather than some firms looking for a hand out? The post on Game Theory seemed to fit very well. JDV seems to be pessimistic about all this as well.

JDV has been pessimistic about everything since this time last year :wink:

JDV is very pessimistic about it, but I don’t want the gov’t makiing money on this deal anymore than I want them losing money on this deal. I like free markets. I like capitalism. What’s really amazing is how many people would happily declare themselves free-marketers and capitalists but desperately want a gov’t bailout. The gov’t screws up everything. They will screw up this too.

JDV looks to be a little pessimistic, imo.

Joey, were you around during the S&L scandal. I remember reading about it in the papers at the time, but I don’t recall any details. Can you or anyone else go through the parallels?

Gecco Wrote: ------------------------------------------------------- > Actually I don’t think this is technically a > “bailout” - treasury stands to make a tidy profit > out of all this. It is not like the trust will > buy assets at PAR. They will be purchased at > steep discounts, often lower than the implied cash > flow characteristics. We shall see how it all > shakes out, but the treasury is not simply writing > a check. I hate when people focus on the “upside” to taxpayers. Suppose that by the grace of god the Treasury makes money on this deal, do you actually believe taxpayers will somehow see a benefit from it? A nice dividend check from the feds, or lower taxes? Puh-lease. It reminds me of the highway tolls, where states claimed that after they collected enough to cover the cost of the roads, the tolls would be removed. Folks, the upside mechanisms are worthless. Taxpayers wont ever see the benefits, and our only concern should be the downside. This whole deal is a total sham and I hope people out there recognize it and let their representative in congress know what you think. Politicians have made this incredibly worse by creating panic. Do people like John McCain, self described economic know-nothings, really need to insert themselves into this? I guess everyone’s an expert now. This all makes me ill.

Yeah Joey, could you also comment about the mid-term prospects for the US dollar? Willy

wegowayback Wrote: ------------------------------------------------------- > Gecco Wrote: > -------------------------------------------------- > ----- > > Actually I don’t think this is technically a > > “bailout” - treasury stands to make a tidy > profit > > out of all this. It is not like the trust will > > buy assets at PAR. They will be purchased at > > steep discounts, often lower than the implied > cash > > flow characteristics. We shall see how it all > > shakes out, but the treasury is not simply > writing > > a check. > > I hate when people focus on the “upside” to > taxpayers. Suppose that by the grace of god the > Treasury makes money on this deal, do you actually > believe taxpayers will somehow see a benefit from > it? A nice dividend check from the feds, or lower > taxes? Puh-lease. It reminds me of the highway > tolls, where states claimed that after they > collected enough to cover the cost of the roads, > the tolls would be removed. > > Folks, the upside mechanisms are worthless. > Taxpayers wont ever see the benefits, and our only > concern should be the downside. This whole deal > is a total sham and I hope people out there > recognize it and let their representative in > congress know what you think. Politicians have > made this incredibly worse by creating panic. Do > people like John McCain, self described economic > know-nothings, really need to insert themselves > into this? I guess everyone’s an expert now. > This all makes me ill. Hahaah, you must be from around Boston!

bchadwick Wrote: ------------------------------------------------------- > Joey, were you around during the S&L scandal. I > remember reading about it in the papers at the > time, but I don’t recall any details. Can you or > anyone else go through the parallels? Too big a topic for me right now, except that in general I think the differences are bigger than Paulson and company would have us believe. The big similarity is that ultimately both were caused by bad real estate lending. The big difference is that deposits in the S&L’s were directly insured by the gov’t. They couldn’t just walk away even if it was the right thing to do. There is no reason at all that the gov’t can’t let GS and company go broke, except that they believe it is in the public interest to rescue them. That’s a really debatable point that didn’t exist in 1990 (or whatever).

“Aside from high taxes, what should we expect going forward? How should I explain this to friends of mine who lay carpet for a living?” JoeyDVivre Wrote: ------------------------------------------------------- > Explain to your friends that they need to really > be attentive to their work, because there will > soon be a huge influx of CFA charterholders > competing for carpet-laying jobs. Funniest comment I’ve ever seen JDV make.

won’t sound funny in 3 months when you’re laying carpets

I enjoy working with my hands *farley would have appreciated this post**

they should replicate what sweden did back in '93. offer the lifeline to institutions in exchange for equity. somewhat like a warrant position. in the end, taxpayers have the upside of the equity position, given the risk they’re assuming. $700 won’t go down the drain. (better than holding on to illiquid assets and waiting/hoping the market corrects itself and have bidders out there to take the toxic debt off the treasury’s balance sheet)

I really suck at laying carpet. The measuring process just never quite seems to work for me. Guys who are good at laying carpet look at rooms and see the shape of the room. All rooms look perfectly rectangular to me.