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A Letter Against the Bailout Plan
- Thread starter OldTrader
- Start date
Quote from IluvVol:
The government will get an investment at such favorable terms, you will see how the valuations will play out in a few years which the government can feel comfortable to hold on to.
It's puzzling why everyone's so filled with urgency over this situation when there isn't even a consensus of the breadth or depth of this problem.
Economist opinions run the gamut. From those that say this problem can be dealt with entirely within the financial community with zero governmental assistance all the way to those that say Paulson and Bernanke are understating the Armageddon we're facing by several orders of magnitude.
So, who's really right?
IMHO, the fact that all that's happening right now has been largely the result of subprime mortgages that started to default about a year ago tells me that it's still way too early to tell and that it's more than likely to get a lot worse a year from now once we've seen a similar percentage of Alt-A and jumbo prime mortgages default.
And then there's credit card debt and auto loans for a kicker.
Personally, the only sensible approach is what was done with WaMu, the shareholders and bondholders have to take the hit, not the taxpayers or the FDIC.
GS and MS are going to need a lot of banks and the ones out there that are financially compromised should be dealt with the same exact way.
Quote from IluvVol:
So, lets make sure we all understand what the intention of the package is gonna be: Its NOT to bail out anyone!!! Its not to get some bonus to departing executives!!! I understand some senators and journalist now love to point fingers to others to look good for themselves as good representatives to the public. However, the MAIN POINT of this package is to put a FLOOR under the valuations of most mortgage products, nothing more, nothing less. We should all understand that houses may still decrease in value for some more time, but prices dont go down to zero, so dont the derivatives of housing prices, to put it into simple terms.
Why this is a bailout?
1) When you bought something that has no market value, you are by default either OVERPAID or UNDERPAID. Paulson makes it clear that taxpayer has to overpay for them otherwise banks won't play ball. Why? If it is sold at market value, banks will go into default and what's the point of asking for a rescue then?
2) The bailout's ultimate goal is to overpaid these asset and allow banks to have a good enough balance sheet to lend again. Also, to prevent the house of card scenario of CDS. Ultimately is to keep the credit bubble keep inflating.
3) If during good times, wallstreet banks took all the profit. Then during bad times, they said without us, the world will end and so, please bail us out. That is call blackmail by holding us economy hostage. What they claim is not true neither.
4) You can bypass all these banks to inject credit. If you have a traffic jam, you don't go thru it by paying each person $1000 and ask them to move aside. You go around it. You can inject credit thru other means by forming a national bank with 700B seed money to lend to company like GM or retail investor, boost up Gennie Mae's capacity, increase government spending, cut tax rate etc...
Quote from IluvVol:
I have to strongly disagree with your comment. None of the contracts that the government would bid for is worth ZERO. That would make no sense. No financial institution is selling out free options that cant decrease any further in value. And the government will not bid higher than fair value. The argument was whether the government should bid lower than fair and I agree to be effective fair values (if something even exists) should be applied.
Another incorrect point you made is that the banks can get prices anywhere else. No, they CANT. The market is totally frozen up, so frozen and under stress that libor rates are at levels not seen in decades. And this is bad for the system not just for some banks. And its not just bad it is life threatening to the whole economic system to say the least.
Why libor rate is high? Because if all these asset mark to market right now, theyse banks are all in default. It is not life threatening to the whole economy because if all these banks went into default, what we will go thru is a credit crunch, decrease money supply or whatever other ways you want to call this.
First, credit bubble is a music chair scenario that is going to end at some point. I can inflate my own credit bubble by getting a 30 yrs mortgage. Then inflate it more by getting a home equity loan. Then inflate it more by getting more credit cards. At some point, I will either default or I can't increase my debt anymore. Then everything come crashing down.
If I never have this much debt before, I can't create a credit crunch.
Quote from poyayan:
First, credit bubble is a music chair scenario that is going to end at some point. I can inflate my own credit bubble by getting a 30 yrs mortgage. Then inflate it more by getting a home equity loan. Then inflate it more by getting more credit cards. At some point, I will either default or I can't increase my debt anymore.
That's the crux of the entire problem.
It'd be interesting, once you take into account all the CMOs, CDOs, MBSs and the CDSs that were written to "insure" those derivatives, just how much these fools geared up your average mortgage dollar.
Quote from IluvVol:
Why would BBT get penalized? Nobody gets penalized. Not a single institution would want to sell any of their mortgage portfolio at such rediculous levels if it was not to conserve every single penny to survive right now? The government will get an investment at such favorable terms, you will see how the valuations will play out in a few years which the government can feel comfortable to hold on to. Why would you feel comfortable to support GE while you would feel happy to let GS or the like go down? Because the GE board and CEO only get a few millions less? Its funny how all point fingers suddenly, interestingly away from themselves.
1) Why would BBT get penalized? It is the 14th largest bank right now. If some of those top banks go into default, its ranking will move up right? It can expand its lending business right?
2) If the mortgage portfolio is such a good deal, how come no one bids on it? If CDO is such a mess, how come no one make any serious effort to de-securitized them. If I know this single mortgage is from this address with this person who has this credit score XXX, I bet I can put a price on it.
3) GM bail out is not good neither. You can argue that they are incompetent. However, for these wall streets guys, they are taking sales commission, interest and bonus upfront thru liar loan, making CDS with no reserve, misprice risk. Then they asked for the taxpayer to be the bagholder. That is where the problem at. Lehman executives walked away with 2.5B package while the company went down. I don't think any auto companies will come close to that.
Quote from jprad:
That's the crux of the entire problem.
It'd be interesting, once you take into account all the CMOs, CDOs, MBSs and the CDSs that were written to "insure" those derivatives, just how much these fools geared up your average mortgage dollar.
1st google link search gives me $62 trillion CDS. It is within the number that I hear all the time, but no one knows for sure.
http://www.rgemonitor.com/econo-mon...e_estimate_of_counterparties_net_cds_exposure
Quote from jprad:
It's puzzling why everyone's so filled with urgency over this situation when there isn't even a consensus of the breadth or depth of this problem.
That's another big problem. You ask Ben and Henry where this number came from? They will say "I dunno, we just want a really big number"
What kind of answer is that? With that kind of money, you give me that kind of ad-hoc answer? FAIL, redo your homework.
They will argue that doing nothing will not help. I will argue that flopping your wings like a chicken won't help neither.
If adding 700B is like adding a pinch of salt to the ocean, what's the point?