A Letter Against the Bailout Plan

[poyayan]

Quote from IluvVol:
But please answer one question: Whats the difference from what we all discussed when you let the government borrow as you suggest (you want the govt to increase spending which implies the former). Then you want to cut taxes? Why? This sounds pretty self-serving to me besides the fact that those two things can hardly go together.

Paulson's plan is injecting credit from :

government -> banks that hold toxic waste -> general consumers and regular business.

Tax cut :
government -> general consumers and regular business.

The net effect of injecting credit is the same. The magnitude of the credit injection is different though. Paulson's one is ~10:1 and tax cut is 1:1.

The effect is the same as if you allow the government to buy assets at rock bottom valuations with upside potential. Thats the govt side. The main effect will be that there are at least valuations out ont he street on which banks can mark their books and start transacting again.

What I suggest bypass valuing these asset by government. Why? No market price means someone is getting a bad deal and Paulson made a point that taxpayers will get the bad deal. If it is such a good deal, Warren Buffet will be on it already. Why we need this bail out bill then?

I really think the general public does not understand where we were last week. We were at the brink of a total melt down and break down of the total capitalist free market system. This has NOTHING to do with bonuses, corporate leaders, golden parachutes and the like. This is to avoid a lot worse when facing the alternatives.

Yes, credit frozen and no banks that hold toxic waste can lend, but banks like BB&T can lend.

There is a reason Buffet started to buy and its very simple. Valuations are low and others are in distress.

I wish him the best.

When other panik thats the perfect time to step in and start loading up on positions, not all at once but you dont want to be of the other side of some powerful players such as the government.

Sure, I agree that you don't want to fight the fed or government, but we are not debating about that. We are debating what government's action should be.

Ultimately, this bail out bill still has a higher chance to pass than not, but doesn't mean it is the correct thing to do or I agree with it.

I sold premium on 1200 near expiration spx puts and bought upside calls. Feel free to laugh at me next week. I may be wrong and then lost my bet on a bailout (note: lost a bet not the farm) but the risk to the upside by far exceeds the risk to the downside with something like this getting hammered out. Should the proposal not get completely watered down because some senators think its time to grind their axes with corporate pay and once this package hits the street we will see a huge swing to the upside. I am not even talking my book because much deeper pockets would hit the street and squeezed out of shorts than some of us smaller traders.

If you make money, great. I am more concern about the future of this country.

As of today, based on intrade, you made a high probability bet.

Having gone through the week before I think something has gotta happen otherwise we will not just stare into the abbys but fall right into it and its gonna lock very dirty then. Again, I am not proposing tax money used for Wall Street bonuses and thats clearly not the intention and would not be the effect of this package. But I strongly believe that doing something on this level far outweighs the alternatives in terms of benefits to the broad public. It similar to when someone wines about capital gains taxes and whether they should realize losses before year end while completely disregarding their actual position and when they should have gotten out of a losing position LONG time ago. In the same way I dont get when people start wining about tax payers money when the government has the opportunity to buy assets at levels that everyone else would die to get in at if they had the funds at their disposal. The crisis is a liquidity crisis.

I will say, if this is such a good deal.

1) De-securitized these CDO and sold them as individual mortgage. It is tedious. It is messy, but it is the best way to value these junk.

2) Taxpayer never gets a good deal because otherwise, you, me, hedgefund or Warren buffet will be on it already. I don't buy this argument at all. Gains are always welcomed to be privatized. They are trying to socialized losses right now.

 

[poyayan]

Quote from IluvVol:


Well, lets see how you look at all this when without any surviving banks the FDIC blows up, you lose your bank savings and assets along everyone else. While this is a very likely possibility some believe that through capital injections valuations can find a floor and the stress in the system will decrease which makes a lot of smaller bank failures much more managable.

Right now, banks that will fail get the ear of the government.

As of today, I know BB&T will be around and they are the 14th largest bank. There are more that are staying silent right now.

I am willing to take that bet.

 

[Allen3]

Quote from OldTrader:

JP Morgan Chase buys WaMu. Bank of America buys Countrywide and Merrill Lynch. Evidently there are some who are now in preliminary discussions with Wachovia. Buffett puts $5 billion into Goldman.

Theres a price that everything will clear at. yeah, it may wipe out the shareholders. It might wipe out the bondholders. But there will be people/institutions who did not take the risks, who will step forward at a price, even if it's on the courthouse steps or the bankruptcy court.

To repeat. This country is based on capitalism....the free market. If you're from another country (which it sounds like you are), then you need to acquaint yourself with the way free markets work. We don't believe in socialism here. And let's call it the way it is, this particular bailout plan is a massive governmental intervention...the latest in a series of steps down the socialistic road.

OldTrader

Agree with you OT. Thanks for lending some longer term perspective, something us younger ones have to learn from history. When people have never seen bad times before, they always say but this time is different, but it never is. Players/names/products change but it will happen the same again and again.

The government now wants to take a bowl of crap, place our pretty little American financial futures in and hope it won't get soiled as well. Someone will lend money to Walmart or Nabisco to run there businesses in a seamless manner when rates for risk come up to deal with reality. Just like somebody will buy the bowl of crap from Goldman sachs and others when the price is right. It'll mean the end of them but that's the price of having an unprotected orgy over there.

Maybe I'm wrong, but i think our country needs a good dose of reality, to bring things back to earth. It's going to happen soon no matter what. Do we really need to take a 700 billion dollar hit of coke before we step into the rehab center.

JIM

 

[IluvVol]

Agree with you on most points but see the reason why nobody has stepped in yet to buy assets is because $5 billion is simply not enough to floor this thing. a 700 bazooka has got a lot more fire power and I would think it has a fair chance of being sufficient. This is not intended to bail out anyone (athough it is unfortunately termed as such by everyone). This is to get those assets some price tag attached and a floor so that others such as private equity can now step in an bid with more confidence. I believe it would work.

Quote from poyayan:

Paulson's plan is injecting credit from :

government -> banks that hold toxic waste -> general consumers and regular business.

Tax cut :
government -> general consumers and regular business.

The net effect of injecting credit is the same. The magnitude of the credit injection is different though. Paulson's one is ~10:1 and tax cut is 1:1.




What I suggest bypass valuing these asset by government. Why? No market price means someone is getting a bad deal and Paulson made a point that taxpayers will get the bad deal. If it is such a good deal, Warren Buffet will be on it already. Why we need this bail out bill then?



Yes, credit frozen and no banks that hold toxic waste can lend, but banks like BB&T can lend.



I wish him the best.



Sure, I agree that you don't want to fight the fed or government, but we are not debating about that. We are debating what government's action should be.

Ultimately, this bail out bill still has a higher chance to pass than not, but doesn't mean it is the correct thing to do or I agree with it.



If you make money, great. I am more concern the future of this country.

As of today, based on intrade, you made a high probability bet.



I will say, if this is such a good deal.

1) De-securitized these CDO and sold them as individual mortgage. It is tedious. It is messy, but it is the best way to value these junk.

2) Taxpayer never gets a good deal because otherwise, you, me, hedgefund or Warren buffet will be on it already. I don't buy this argument at all. Gains are always welcomed to be privatized. They are trying to socialized losses right now.

 

[poyayan]

Quote from IluvVol:

why nobody bids? The answer summarizes the whole problem at heart: Because nobody has any funds to spend at the moment. The government has. That simple. Its a liquidity crisis, cash is king, no matter how cheap stuff is, survival comes first, then all else. Lehman unfortunately got this priority badly mixed up.

Not true.

New Money Pouring into Funds Targeting Distressed Deals - these guys made a killing on the way up and they are trying to do the same on the way down. They are lions on safari. I have no problem with them at all.

BlackRock and U.S. hedge fund form company to buy distressed mortgages

Six ventures ended August reporting raising about $1.5 billion of new capital to invest in distressed assets.

Why they haven't bought any yet? Price is not low enough yet.

Google and search for distress asset fund. There are plenty of them.

 

[BeatingtheSP500]

What's kind of ironic about the risk to taxpayers of this $700b bailout. We keep hearing about the risk to taxpayers.

Here's an example:
If the fund spends $700B on these distressed assets yet eventually only only recoups $550B, there is a cost to taxpayers of $150B. So where did the money go, or more to the matter - who didn't fulfill their obligation? The TAXPAYERS (who didn't pay their mortgage)

 

[poyayan]

Quote from IluvVol:

Agree with you on most points but see the reason why nobody has stepped in yet to buy assets is because $5 billion is simply not enough to floor this thing. a 700 bazooka has got a lot more fire power and I would think it has a fair chance of being sufficient. This is not intended to bail out anyone (athough it is unfortunately termed as such by everyone). This is to get those assets some price tag attached and a floor so that others such as private equity can now step in an bid with more confidence. I believe it would work.

See my previous post, there are lots of private money in this world. Give them a deal and they will magically show up.

Also, Buffet is a smart investor. He is not blowing all his money in one shot. His has many bullets and each one is 5B.. Plus for the sweet deal he got, I want to be in too!!!!!!!!

 

[bbqbbq]

Quote from IluvVol:

Agree with you on most points but see the reason why nobody has stepped in yet to buy assets is because $5 billion is simply not enough to floor this thing. a 700 bazooka has got a lot more fire power and I would think it has a fair chance of being sufficient. This is not intended to bail out anyone (athough it is unfortunately termed as such by everyone). This is to get those assets some price tag attached and a floor so that others such as private equity can now step in an bid with more confidence. I believe it would work.

don't catch a falling knife.
do you think the stock market in 2001 would not have crashed if the government intervened with 700 billion injection of stock purchases??

 

[jprad]

Quote from BeatingtheSP500:

What's kind of ironic about the risk to taxpayers of this $700b bailout. We keep hearing about the risk to taxpayers.

Here's an example:
If the fund spends $700B on these distressed assets yet eventually only only recoups $550B, there is a cost to taxpayers of $150B. So where did the money go, or more to the matter - who didn't fulfill their obligation? The TAXPAYERS (who didn't pay their mortgage)

But, Paulson has been talking about mortgage-related assets; derivatives.

All it takes is 5% of the mortgages to go into default to kill an asset that was geared up 20:1.

 

[poyayan]

Quote from BeatingtheSP500:

What's kind of ironic about the risk to taxpayers of this $700b bailout. We keep hearing about the risk to taxpayers.

Here's an example:
If the fund spends $700B on these distressed assets yet eventually only only recoups $550B, there is a cost to taxpayers of $150B. So where did the money go, or more to the matter - who didn't fulfill their obligation? The TAXPAYERS (who didn't pay their mortgage)

What kind of logic is this? About 60% household owns a house. About half of them own their house out right. Of the people that has a mortgage, a small % of them default on their mortgage.

I am all for going after those home owners that default on their mortgage, but don't socialize the loss to 100% of all taxpayers.