Re: An attempt to argue that "the government will make money off of the bailout"
If you'll recall Tim, my position was that it was MUCH MORE LIKELY that the 'government' (the American taxpayers ultimately obviously...) would stand to LOSE vast amounts of money on this Bush Bank Bailout proposal... unless and *only* unless the Treasury demands and receives significant OWNERSHIP INTEREST (and at hard-bargained 'Buffett-like' favorable prices, like any prudent investor would want) in any and all banks that get bailed out.
Not that that would 'guarantee' a profit ultimately to the taxpayers (what investment ever is 'certain' to profit, after all?)... merely that only that would give a fair chance at not losing big amounts, or possibly even making a little.
But the Bush Treasury's plan to PAY ABOVE MARKET PRICES to buy all the 'toxic' financial sludge from Wall Street and the Big Banks (even the foreign ones)?
It almost a lead-pipe cinch that that way will gouge the taxpayers.
After all, just think: At LEAST '$700 Billion'. (Perhaps much more). More then the entire cost of the Iraq War to date. More than the IMF has spent on ALL COUNTRIES in it's entire history. The biggest bailout in the history of the world.
WORTH buying a little 'equity upside' I say, for taking all that risk, if we must take it.
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Now, as to the Bloomie opinion piece (Delong's, I believe) and your well considered arguments against it.
Delong appears to be arguing the case that there is real profit potential, (and, I agree that *potentially* it could work out this way).
Of course, it's also *potentially* possible that this keyboard I'm typing on will fly up into the air under it's own volition --- since all of the billions of atoms that make it up are currently vibrating --- all they need to do is, by pure chance, vibrate in the same direction at the exact same time.
Still, since it all comes down to the actual ODDS for such an event, I certainly would not COUNT on it happening. <GGG>
Now, as to your comments. I cannot find any reason to disagree with any of your three points.
So I won't.
As you correctly note: the probability for profit is much affected by the ACTUAL PRICES that will be paid for each instrument. Which we can't know yet.
Pay too high a price (& Paulson is claiming that the "market has got the prices WRONG", and that many/most of these securitized packages will be "worth more" if only held longer... perhaps all the way to maturity for the underlying mortgages. So: held MANY YEARS possibly), and there will be no profit for you at the end of the trail.
And he (Paulson) proposes paying MUCH MORE than what the market is willing to bid these days....
On THAT ONE, I'm much more likely to believe that the MARKET has got the price RIGHT (more often than not)... and that Paulson already knows this. Which, in my book anyway, is what lends this whole exercise much more of the flavor of an INDUSTRY SUBSIDY and a DIRECT BAILOUT... (& not so-much a "carry-trade" arbitrage profit opportunity).
Although, as I previously noted, it IS technically possible that --- if a hard enough bargain were ecked-out in bidding for some of this stuff --- down the road an improvement in the general economic conditions and thus in the fundamentals that underlie these derivatives could possibly produce profits. Or, at least, smaller losses.
Still --- and this is one of my main objections to the 'plan' --- if you try to drive a hard enough bargain, based on true market assessments of the value of the instruments... then what need would the Banks have for this bailout anyway? They could just sell into the free markets. They would not need a government bid.
No... I'm afraid one must OVER-PAY to get widespread participation (which certainly, and directly, cuts into whatever "carry trade profit possibilities" that you were hoping for).
In my book you might as well just buy senior equity in the Banks and be done with it. The banks get recapitalized (allowing them to resume normal lending --- which is what the government claims it is after), and the 'panic' is over and the MARKETS get to decide what the true value is for these mortgage securities.
I'm betting that the markets will do it better.
(True, most existing equity stakeholders in any institutions that get bought out by the government will take a bath on their equity stakes --- this is the model applied to Fannie, Freddie, and AIG --- but, hey... didn't they, the 'owners' let management screw up their businesses anyway??????? Time to fire the trash and make sure there is better management and better risk control in the future... more long-term incentives for management and far less short-term ones!)
ONE OTHER WEAK POINT I find in Delong's argument. He says this:
"...With investors around the world clamoring to buy risk-free Treasuries, the market should be able to absorb the jump in supply without a significant increase in yields."
I find that extremely suspect.
Truth is that 'investors around the world' ARE NOT "clamoring to buy 'risk-free' Treasuries" --- just the opposite.
TRUE, they WERE clamoring to buy T-Bills (but not long Treasury or Agency Bonds)... but *only* for a few days while under the abnormal influence of a GLOBAL FINANCIAL PANIC.
Simply were looking for a very SHORT-TERM island of relative safety (even drove the T-Bill rate *negative* for a few hours... WOW! When was the last time anyone ever saw that?)
The proof of the assertion that the world will be eager to line-up to finance America's LONG-TERM DEBT will be tested in the upcoming Treasury auctions of 20 year bonds and such....
And, I believe that the early rumblings are exactly the opposite --- that the world REALIZES the huge hit to America's sovereign balance sheet that this bailout represents (and the DOUBLING of our national debt that has already happened by the assumption of the debts of Fannie and Freddie....) And, of course, the ongoing drag of $10 - $12 Billion a month for Iraq (15 or 16 Billion, I believe, with Afghanistan added in), etc., etc.
More likely long rates rise and the dollar resumes it long-term relative decline... and thus, the cost of selling more government debt *rises*, not falls.
(Which, needless-to-say, cuts into the "carry trade" possibilities.) |
