A Letter Against the Bailout Plan

[jprad]

From another thread:

http://www.nytimes.com/2008/09/27/b...ml?ref=business

"The huge total reflects the way the market is structured, as well as the fact that someone does not need to actually be owed money by a company to be able to buy a credit-default swap. In that case, the buyer is betting that the company will go broke."

If the government had any sense at all they'd declare these naked CDSs null & void before the Asian markets open...

 

[IluvVol]

I did not say its not a bailout. I claim that individuals are not getting bailed out with this plan. I agree on many of your points below. I am not saying the Paulson plan is great, in fact, I disagree with the lack of details he failed to deliver to even know how the funds are gonna be exactly used.

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

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.

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.

Quote from poyayan:

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...

 

[IluvVol]

this is a liquidity crisis and a lack-of-confidence crisis in the system. If banks had ample liquidity they would hold onto their assets without consideration.

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.

Quote from poyayan:

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.

 

[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.

Quote from poyayan:

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.

 

[IluvVol]

...unless you can borrow at will. Be my guest to bet against the Fed and Government.

Quote from bbqbbq:

you can't buy a floor with $700 billion. you need at least $7000 billion.
don't catch a falling knife!

 

[jprad]

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.

How does the FDIC blow up when it is "backed by the full faith and credit of the US government?"

Not that I want them to print any more of it, they've printed a bit too much already.

 

[sprstpd]

Quote from IluvVol:

why nobody bids?

But there are bids from private equity. The banks just don't like the bids. That is the problem. The banks want to have their cake and eat it too.

 

[IluvVol]

Who said there is no risk? Point is there is upside potential in those assets for those who have the ability to spend cash = govt. Question is what risk do you see when nothing happens, credit markets tighten further, corporates will lose any access to funding, CDs, savings, even checking accounts will be in danger of getting completely swollowed up in this mess. I prefer as tax payer to have at least a try to losen up credit and short-term funding markets with the opportunity for the govt to nicely cash in from those assets couple years down the road.

Isnt it funny. In some way no tax payer will actually have to pay a real penny nor will taxes be increased. But the media and some laymakers created this self-serving hype that tax payers will be on the hook for years to come, tax payers will go to the poor house. What a bullocks. Its all jealousy and hatred for those who cashed out generously, whether deserved or undeserved. I personally dont care at all about those guys. I mind my investments, savings, cash in the bank. I think people really dont get how dire the situation was last week, FDIC was in serious danger to get blown out. CDs were/are under water, a run on banks is going on not just in the US but Asia and Europe as well. Heck, and we mind the millions someone got paid on the way out.

Quote from OldTrader:

Exactly. Excellent point. The government intent is to overpay, since if they pay the a "firesale price" it will bankrupt the institution. Then the "hope" is that they can then hold the asset long enough that it will rise in value, and they can get out whole. So the bottomline here is that the taxpaper is in the tank right out of the chute.

Next problem. Underlying all the mortgages is a house. As the homeowners default, there is a need to foreclose, your lose money as you dump the house, etc etc etc. In other words, there are costs and other market risks.

OldTrader

 

[IluvVol]

Hey mate, I am in there as much as you are, maybe not my tax money but I simply think the investment in those assets is better than the alternative of doing nothing. Simple as that.

Below you want to compare the valuation of some stock with some of the most complex credit and rates derivatives? That does not make much sense. Not a single mortgage security clears right now, nor any of its derivatives for lack of valuations PLUS lack of liquidity. The govt can solve both, A floor in effect will re-strike the valuation on those assets plus the govt is solvent enough to actually step in and buy. The very same thing is what Buffet has done. This has nothing to do with socialism or whatever. By the way, living in Asia in one of the freest economies in the world, I would argue that the American financial system was all but a "free market". Short selling rules, separation of bank and brokerages, repeated govt and fed interventions, and many others point to the fact that the system has NEVER been as free as you wish it to look like. So why being afraid of having the govt step in, loading up on dirt cheap assets that are hard to devalue a whole lot more. Not sure about you, but I dont expect housing prices to approach the price of a sedan anytime soon ;-)

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

 

[IluvVol]

exactly my point, and thats why the government will step in now or later. Much can be averted by doing something now than waiting and having to bail out hundreds of thousands of savers because the FDIC pool is all but empty.

Quote from jprad:

How does the FDIC blow up when it is "backed by the full faith and credit of the US government?"

Not that I want them to print any more of it, they've printed a bit too much already.