I believe this bailout legislation is fundamentally flawed, and puts far too much power in the hands of one (very suspect) man, and with almost none of the 'compromises' legislated with any teeth. I believe it is fundamentally flawed because it doesn't address the fact that the underlying investments (houses) that banks bought at the peak of a bubble and mortgaged to their customers continue to fall in value, and will continue to do so for some time -- and that's without the consequences of all the derivatives derived therefrom.
This $700 billion will be thrown away, and the market will continue to get worse. That money could be invested now in many other ways that wouldn't accrue just to the few or just disappear.
This entire process has been a sham legislatively, the voices that have been predicting this mess for years have been entirely shut out of the conversation, and our legislators are acting purely out of fear. This is the opposite of leadership and sober action.
I suspect the bailout will pass, and if it does I hope it works. However, I suspect that we'll find ourselves in a worse situation in the near future in spite of the wasted hundreds of billions.
If Congress keeps dragging this on, and it keeps getting voted down, it is going to continue to panic the markets. We'll have another black Monday.
There has got to be a much more affordable way to calm the markets and solve the core problems.
And then throw in the fact that I don't trust this administration. Fool me once...
The securitization piece is just what Fannie and Freddie have been cornering the market on for years. You take a bundle of loans, package them as a bond and sell that bond to investors. In fact, if you look at the Toll Road project for 495, securitization was one of their funding ideas. You take toll revenues repackage those as bonds and investors pick those up. In the case of the loan originator, you get all that money you just lent back because an investor bought it from you. And in the case of the construction project, you get all that money to build the road up front and you can let someone else worry about whether it generates sufficient toll revenues later on. Even with this, it's just a matter of weeding out the bad from the good. Because certainly not all of these securities are worthless. And, in fact, really none are worthless. They have some value. At the very minimum, they have the foreclosed value of the collateral they are ultimately set against.
The government may overpay. But the bill specifies that we get warrants as a part of the deal. So, if JP Morgan's stock hits a record high after we take these things off their hands, well we can use the warrants to take that gain for taxpayers.
If it doesn't work, we'll try something else. But this may be exactly the kind of leverage that the Fed and Treasury need to cajole financial institutions into pulling back from crazy mode.
We can argue the semantics of the mortgage, but essentially the bank is buying the house at a fixed price, and the person or family that actually owns the house is buying it back from the bank over a fixed term. Yes, technically you are correct, but the point is that banks were paying for houses at the top of a very unsustainable bubble, and we're no where near the bottom of that price curve.
So, the Fed is going to come along and buy some of these MBSs -- and somehow this is going to get them all trading again? Isn't the underlying credit problem still the same, that these banks are undercapitalized and can't meet their contractual obligations as these derivatives start triggering when certain loans default, etc.? That's what happened with AIG, right?
These banks are insolvent -- they were way overleveraged, and now it's going to be ugly as it all shakes out and is accelerated by the CDSs. So, the Fed coming in and buying these securities at cost ... how does that change the underlying fundamentals of the collapsing asset bubble?
And, yes, we get warrants ... but the legislation specifically does not state that it is dollar for dollar. It is at the discretion of the SecTreas as far as I can tell. The executive compensation language is toothless, so public debt will be used to keep overpaying executives of insolvent companies, people that have benefited greatly on the way up.
The credit markets have to shrink, and they have to cause destruction of companies to do so. The Fed and the Congress should be focused on ensuring that as little collateral damage as possible ensues on the way down.
Again, now that the fix is in, I hope it works. But I still don't see how it can.
I'm afraid we don't know who is and who isn't solvent. We know that a market panic can dry up credit instantaneously leading to immediate collapses of financial institutions. There is no perfect match between the timing of payments and receipts. So at any time you need to borrow money short-term or invest money short-term. And if you have a trading operation, you need to meet some credit requirements or post a letter of credit or some other credit guarantee. If suddenly no one lends to you on a short-term basis and your trading partners nix your credit limits, then you cease operations. Or you beg some big banks for mercy and if they don't give it, then it is bankruptcy protection for you.
If we stop that panic, then lending opens up again. You can still operate your company through these tough times and continue your trading desks. People go back to buying Commercial Paper. And debt market spreads return to something reasonable.
The package should produce one last round of write-downs and then we all hit a floor. Once we all know there is a floor, everyone can relax. And everyone can trust one another's books again so that they lend freely instead of hording. And we will have saved Global Capitalism in the process, whew!
The horse isn't quite out of the barn yet (we'll see what happens in the House), but I'd imagine the bill will pass tomorrow.
But hopefully this legislation will allow the credit markets to shrink slowly instead of a sudden, severe contraction. Is that bet worth $700 billion? There's the rub. If we get through this without too much pain, there had better be hell to pay for the financial industry in the next Congress in the form of tons of regulation of this shadow banking system.
BTW, if I were in Congress I'd go along with the bet only if it were paid for by Senator Sanders' surtax or a finanical transactions tax, but otherwise no way.