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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Keith Feral who wrote (84740)	9/7/2008 11:50:43 AM
From: The Reaper	Read Replies (1) \| Respond to of 116555

I want to post this here as well to get feedback. I'm going to drink the kool-aid here. I think we are clouded in our assessment of this "bail-out" plan because we are all short financials. Let me be the first to say that I've had my head handed to me since July 15. I foolishly thought that market forces would dictate how these stocks would perform. Having said this, and I think we all know full well that the mortgage system can't be allowed to fail if we are going to survive as a superpower, allow me to postulate how this is going to work with the taxpayer coming out of it whole and then some. We have to make some assumptions first. 1) A $5 Trillion loan portfolio should be able to earn a net 1%. This margin could be achieved by raising the cost to borrowers and reducing the cost of funds for the GSE's by making the interest on new debt tax-deductible. Since the GSE's are the only game in town now to buy mortgages they could conceivably set their own rate of return. 2) A default/foreclosure rate of 5% on the $5T portfolio, and a recovery rate of 50% on those loans. Loss = $125B spread over the next 3 years, all the while Treasury contributing $ to make up the shortfall via the new "senior preferred stock". 3) GSE's announce on Monday that all dividends on stock common and "old" preferred are suspended for the forseeable future and let the market do it's job and take those out to the woodshed. With those 3 assumptions in play, here's how I see this working out. Earnings from the entity for the next 3 years are going to make up the losses incurred on the portfolio for a wash with the added kicker that Treasury buy up the current outstanding common and preferred stock. That, in my opinion could be done with $10B over the next 3 years anticipating where these stocks will be trading. After 3 years, assuming that the portfolio has been flushed at this point, there should be left an entity with an enterprise value of $500B (10 x earnings). Remember that this entity has a monopoly on the secondary mortgage market. At this time Treasury sells the entity back to the public in an IPO. Treasury/taxpayers make $350B on the offering, system saved. I am a financial hack. If I could postulate this chain of events, certainly the brainiacs that are getting paid 7 figures to come up with a bailout plan have envisioned this. This plan might and in fact will probably work. Now I've left out a thousand details but you all get the big picture here I think. Don't let your emotions dictate what you do with your short financial positions. Try to open your minds to the possibility of this working. I'm ready for the flaming.