what is Paulson trying to fix?

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Arbez
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what is Paulson trying to fix?

Post by Arbez »

Congress is busy discussing ways to spend our tax dollars to bailout Wall Street.
One boglehead thread said "You also must provide an alternative. Asking Congress to do nothing simply will not fly."

OK, I feel like making a stand on this, but am not sure which approach will work. To me, the first step is to define the problem. I do not want to play the blame game here (as much fun as that is), but want to end up with an idea about which solutions people think have the best chances to work.

Anyway, as a start, do you agree with the problem statement below?




problem: Collapse of the housing bubble has led to a crisis in the mortgage market. This has caused the U.S. financial system to become undercapitalized.


solutions to recapitalize the U.S. financial system:

1. Use $700 billion to buy mortgage based securities. (Paulson's original proposal http://www.housingwire.com/2008/09/21/f ... -proposal/ )

2. Give loans to recapitalize key financial firms. Charge a high interest rate. Loans must be fully repaid before any dividends, share buybacks, or bonuses are given. (e.g. AIG, only without the 80% equity takeover)

3. Swap debt for equity. (Dodd's proposal http://bloomberg.com/apps/news?pid=2060 ... refer=home )

4. Do nothing. Expect many companies to go bankrupt. (e.g. Lehman Brothers)



Some discussions on this topic:

Petitition Congress regarding the bailout.
http://www.bogleheads.org/forum/viewtop ... 1222192188

Important Article "Why Paulson Is Wrong"
http://www.bogleheads.org/forum/viewtop ... 1222189430

Why should taxpayers be on the hook at all?
http://www.bogleheads.org/forum/viewtop ... 1222196442

Paul Krugman on the bailout
http://www.bogleheads.org/forum/viewtop ... 1222196140
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Arbez
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Post by Arbez »

other possible problem statements:

problem: There is a crisis of confidence. Banks do not trust borrowers, and so are refusing to make loans. This has lead to a credit crunch.


problem: Derivatives are too complicated to understand, and so undermine the market. Companies take on too much risk, and reap the rewards. When the Black Swan comes calling, the company goes bankrupt, and must be bailed out by the taxpayer. Profits are privatized, losses are socialized. http://conversationstarter.hbsp.com/200 ... the_m.html
chaz
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Post by chaz »

It seems that the Treasury Secretary wants to bailout his friends.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page
mksanjay
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Post by mksanjay »

chaz wrote:It seems that the Treasury Secretary wants to bailout his friends.
The "Conspiracy Theory" gene in me is also making me think like that..but in my opinion from listening to NPR, reading about it, and listening to some gurus in the market, I think it is actually worse this time.

What I think
========
The financial institutions that the US government is trying to bail out are the life line in terms of credit flow to many companies in US. If these financial institutions choke, they stop lending $s to these companies, which in turn have to lay off a lot of people. Not only that, the stock prices of these companies will come to a near zero, which in turn means, not only did these laid of guys, don't have salary but their investments have gone down to zero and some of the banks in which they have their savings will also loose their $s(like the MM funds falling below $1). So, in result, not only did they loose their job, but also loose their savings, and they in turn will not be able to pay their mortgages etc., The only guys who would be able to eat and actually buy stuff at that time are those who actually hid their cash under the carpet.

May be I'm too off..but this is just what I think they are trying to avoid.

Sanjay.
Last edited by mksanjay on Wed Sep 24, 2008 12:38 pm, edited 2 times in total.
Plainsman
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Post by Plainsman »

chaz wrote:It seems that the Treasury Secretary wants to bailout his friends.
I think it goes a bit deeper than that.

Fear peaked last Thursday...banks became even more unwilling to loan to each other, not confident that they would be repaid...money moved out of money market funds at an alarming rate, creating a run-on-the bank of sorts.

If banks are unwilling to lend to each other, consumer and business loans become difficult to obtain.

Consumer spending decreases; businesses down-size and unemployment rises.

The economy begins to contract.

The stock market reflects the poor outlook of American businesses and plummets.

Bernake called this the most significant financial crisis since WWII. I will certainly concede that Paulson's prior position with Goldman Sachs raises questions about his current motives, but I would be careful to oversimplify things. A lot of very smart people that know a lot about monetary policy got very, very scared last week.
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DiscoBunny1979
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Post by DiscoBunny1979 »

Plainsman wrote:
chaz wrote:It seems that the Treasury Secretary wants to bailout his friends.
I think it goes a bit deeper than that.

Fear peaked last Thursday...banks became even more unwilling to loan to each other, not confident that they would be repaid...money moved out of money market funds at an alarming rate, creating a run-on-the bank of sorts.

If banks are unwilling to lend to each other, consumer and business loans become difficult to obtain.

Consumer spending decreases; businesses down-size and unemployment rises.

The economy begins to contract.

The stock market reflects the poor outlook of American businesses and plummets.

Bernake called this the most significant financial crisis since WWII. I will certainly concede that Paulson's prior position with Goldman Sachs raises questions about his current motives, but I would be careful to oversimplify things. A lot of very smart people that know a lot about monetary policy got very, very scared last week.
------------------

Maybe this is what's suppose to happen . . . that we need to live within our means and NOT borrow any more money. People shouldn't buy what they can't pay for.
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tadamsmar
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Post by tadamsmar »

Here's my crazy idea.

Give every taxpayer a few thousand in special mortgage bond money that they must hold for a few years. Tax payers are limited to investing this money in mortgage bonds.

Private firms provide the bond offerings under federal oversight rules.
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dmcmahon
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Post by dmcmahon »

I still don't understand why $700 billion couldn't be used to create a new "super bank" that could do all that lending that is supposedly frozen up. The new super bank would be clean and have no toxic crap investments. Then the "old bad banks" can sink or swim on their own. JMHO...
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tadamsmar
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Post by tadamsmar »

tadamsmar wrote:Here's my crazy idea.

Give every taxpayer a few thousand in special mortgage bond money that they must hold for a few years. Tax payers are limited to investing this money in mortgage bonds.

Private firms provide the bond offerings under federal oversight rules.
Also, the taxpayers could sell trade their bonds for cash in the open market.
Rodc
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Post by Rodc »

dmcmahon wrote:I still don't understand why $700 billion couldn't be used to create a new "super bank" that could do all that lending that is supposedly frozen up. The new super bank would be clean and have no toxic crap investments. Then the "old bad banks" can sink or swim on their own. JMHO...
Off hand I'd say that is a very interesting idea.

As to the problem, I think overly complicated, overly intertwined, overly opaque derivative deals and a lack of regulation. If you don't fix that they will just do this all over again. Might take 10 or even 20 years, but we'll just wander in a circle.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
FFR1608
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Post by FFR1608 »

The toxic home loans are a few specks of horse s*** in your ice cream. That's a very plain way of saying markets are stalled because folks are afraid of all bond assets because the market doesn't know who or what is toxic.

There is another problem to include in the list of problems - the
problem of the "shadow banking system". These "shadows" include hedge funds among other types.

The reason the banking system is regulated is that it has similarities to a pyramid scheme. If $1,000 of new money goes to the banking system with a 10% reserve requirement, the money supply increases to $10,000. That is because each bank that receives a deposit only keeps 10% and loans out the rest.

This is very profitable for the banks because $1,000 became $10,000 and they can charge 10 times as much interest. The only hitch is the bank depositors are short-term folks and the borrowers are long-term folks. So where to get the cash when the short-term folks come in? Normally, the 10% deposit covers those needs. But some times there is a "run" and the bank doesn't have cash. Then it goes to the Federal Reserve.

Hedge funds work on the same principle, except in reverse. They borrow to leverage their investments instead of loaning. An investor puts in $1,000, and the hedge fund borrows $29,000. The hedge fund puts $30,000 in the market(a 3% equity position). And then the hedge fund pays the investor 1% annual return on the $30,000 investment. The hedge fund investor is thrilled with his $300 return on his $1,000 investment. Everybody happy? Not everybody, the short term lender doesn't want to play her part in keeping this ball of wax rolling. She wants her cash now. There is no Federal Reserve window to resolve this problem, hopefully this is not the problem Paulson wants to fix because I think the hedge fund investors should get zip. The creditors should get whatever the market investment is worth. Hopefully Paulson's plan is to flush the system by speeding up the payment to creditors what their security interest is worth.

The little mutual fund money market disaster was another example of "shadow banks". The money market funds were lenders like banks. Kindly, the government agreed to open a special window for these "shadow banks". How quickly "free market" enthusiasts fold when distress hits something important to them. And how little regard they have for the folks who were hit by the "world trade" agreements.
Plainsman
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Post by Plainsman »

DiscoBunny1979 wrote:Maybe this is what's suppose to happen . . . that we need to live within our means and NOT borrow any more money. People shouldn't buy what they can't pay for.
I wholeheartedly agree. The libertarian economist in me up until this point has said that this whole mess has to play itself out.

However, if modern fiscal and monetary policy can stave off a depression, then I am in favor of the "bailout." I got concerned last week when the likes of Paulson and Bernake got very rattled with what was happening. In the end, Paulson's plan has the potential for making money for the government (see Bill Gross' article in today's Washington Post) and those financial institutions that dug themselves into deep holes will find themselves with the burden of heavy regulation in the future whether Paulson's plan goes through or not.
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rwcox123
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Post by rwcox123 »

I recommend glancing at the following set of slides, from a meeting of the Princeton Econ department faculty (Bernanke's previous position was Chair of that department):

http://econ.princeton.edu/news/crisis-panel.html

Some ideas are very loosely outlined about the problems and potential solutions.
Beyond all hope, set free to light.
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samurai sam
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Post by samurai sam »

I'm skeptical of anything coming out of Washington, but Dodd's proposal has aspects to like about it, and is certainly better than Paulson's plan.

1. equity stakes
2. oversight ( yea right )
3. some penalties

http://bloomberg.com/apps/news?pid=2060 ... refer=home

From what I've read, and my own gut, I'm still not sold on this whole idea however executed. The entire concept stems from panic, and from the brains of those who have mismanaged this whole business from the start. It's not even clear this won't make a bad situation worse. One thing Paulson got right, aside from the physical damage, this just embarrasing.
'Conquer the self and you will conquer the opponent.' - Takuan Soho.
bookshot
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Post by bookshot »

To avert a total, possibly permanent credit freeze.
Do you not think the markets are telling you something when treasury bills are at 0%? Do you think institutions paying the government to just watch their money is not the equivalent of you putting money under your mattress?
Imagine a situation in which small businesses can't get loans to start up, corporations can't borrow to expand and consumers can't borrow to buy a house. Meanwhile, institutions that properly rely on leverage (banks and insurance companies, for example) go bankrupt, and those with capital have little will to buy them out.
What do you think would happen to the economy, your job, all your insurance and your investments? What would the free market diehards be asking the government for then?
Anybody who doesn't think this is a crisis is in deep denial.
It is clear from recent reactions of the markets, the fact that the feds are considering doing something - anything - is the only thing keeping the economy afloat.
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Arbez
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Post by Arbez »

Krugman's last slide seems to indicate that there is a pricing problem. The toxic debt cannot be valued because foreclosures continue to rise.


"The problem: balance sheet of Capital Decimation Partners

Liabilities
Debt 500

Assets
OK stuff 465
Toxic waste 50


So “taking the troubled assets off balance sheets” isn’t
the issue –the question is, at what price???"
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Judsen
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Post by Judsen »

Corrections can be posponed but they cannot be avoided.
The term that comes to mind for me is "caveat emptor".
In the past whenever I bought a lemon, if it was a car I drove it until I could afford to sell or trade it. The same was true if it was a house or a fund with a front or back end load and a high ER.
I learned at my expense not to buy hope or junk or toxic debt.
Monied financiers are drooling over the opportunity to buy discounted MBS (Mortgage Backed Securities).
The bail out will only postpone the inevitable correction.
Who ever avoided insolvency or bankrupcy by paying their creditors with borrowed money??
As I said in a different thread, "The Banksters are holding the economy hostage" and I say now Let them eat paper!
There is no easy way out. (Credit is the problem not the answer.)
Jud
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DiscoBunny1979
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Post by DiscoBunny1979 »

bookshot wrote:To avert a total, possibly permanent credit freeze.
Do you not think the markets are telling you something when treasury bills are at 0%? Do you think institutions paying the government to just watch their money is not the equivalent of you putting money under your mattress?
Imagine a situation in which small businesses can't get loans to start up, corporations can't borrow to expand and consumers can't borrow to buy a house. Meanwhile, institutions that properly rely on leverage (banks and insurance companies, for example) go bankrupt, and those with capital have little will to buy them out.
What do you think would happen to the economy, your job, all your insurance and your investments? What would the free market diehards be asking the government for then?
Anybody who doesn't think this is a crisis is in deep denial.
It is clear from recent reactions of the markets, the fact that the feds are considering doing something - anything - is the only thing keeping the economy afloat.
----------------------
So, if the bailout does happen, does it mean that house prices will stablize, and banks will loan money to all those illegals with TIN numbers to buy a house in the Inland Empire????

The reality is that even if the bailout helps wall street get their act together, the types of loans that will be done in the future will still require documentation of income, time on the job to show job stability, a certain $$ in the bank, and if buying a home to get the best rate, 20% down. Has Bank of America rescinded their plan to give Illegals Credit Cards???

You talk about leverage . . . and isn't that part of the problem? There should be some kind of rules in place whereas one can not get a loan for a Primary Residence if that monthly payment exceeds 30% of gross income. PERIOD.
bookshot
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Post by bookshot »

Leverage is necessary to conduct business. It is not to be confused with what has been allowed to go on recently in all markets, from commodities to housing.
I agree that lending practices (resulting from the idea that everyone is somehow entitled to own a house) are the root of the problem and we need to tighten loan requirements significantly, but let's not confuse getting out of a mess with preventing one. Or cutting off your nose to spite your face.
jaxbmw
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Buffet Convined Me

Post by jaxbmw »

This morning I heard Buffet on CNBC and his voice wavered when he discussed last Thursday. This problem is real.

The markets are stuck and anything that goes to help them clear I am for
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samurai sam
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Post by samurai sam »

This "let's just do something, anything" talk reminds me of the car stuck in the sand with the driver gunning the engine in a desperate attempt to get free, accomplishing little but to sink the vehicle further into to mire. In a more rational moment he might consider finding a suitable piece of wood or similar to give the wheel something to get traction on. This bailout plan strikes me as a desperate driver trying to "gun" his way out of the sand. Ironically Paulson used the term "bazooka" as his implement of choice to deal with this crisis. We need a surgeon, not a butcher.
'Conquer the self and you will conquer the opponent.' - Takuan Soho.
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daryll40
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Post by daryll40 »

I just heard a better explanation of how this will work. The $700 billion is the gross value of the loans that need to be cleaned up. Depending on what those loans are bot for and what they are eventually sold for the true net cost could be much lower and in fact might even be profitable (although we're talking government here). It was pointed out that the S&L cleanup was estimated to cost $300B but in the end the net cost was "only" $120B. And that $120B was in 1989 dollars so it's still a lot of money. But the point is that if the net cost is $200B or $400B it's a financial nightmare. But NOT doing this will be a total financial and personal tragedy for most of us. I was wavering about this bailout before, but after hearing this latest explanation it appears to me to be the least painful solution. Put in CEO caps etc but let's get it fixed already.
FFR1608
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Post by FFR1608 »

A light just went off in my head. Goldman Sachs is amongst the people to be rescued. I am trying to figure out why.

In an earlier post about "shadow banks" I posted an example of how a "hedge fund works". So here is how I suppose an investment bank like Goldman Sachs works. A broker at Goldman Sachs thinks its a good idea to do a leveraged buyout of say, Chrysler. So she finds somebody who wants to buy Chrysler and she finds somebody to loan the money. So the deal is consummated. She and Goldman Sachs make big commissions. Another deal with possibly short term loans supporting long term investments. Is this the kind of deal that Treasury Secretary Paulson wants to bailout? I think the guys who loaned the money deserve what the market thinks the bought-out company is worth. And the borrowers and Goldman Sachs get no money. Otherwise this deal is welfare for the rich. I don't make my investments with a bottom supported and guaranteed.

I am wondering what Goldman Sachs has that Warren Buffett is willing to pay money to get a share of?

Or do leveraged buyouts work someother way? I have always wondered where the money came from for deals that paid lots more than the stock market for companies. I would really like to know.

If this is the deal that Paulson is bailing out, I don't understand why a bailout. Everybody involved had to know it's high risk buying companies at more than market. Why do the original deal makers get bailed out? Nobody twisted their arm, or hid toxic facts.
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Arbez
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Post by Arbez »

OK, the best solution and analysis I've read is given at this thread (which unfortunately is locked):
http://www.bogleheads.org/forum/viewtop ... 1222290937

Obrian0 wrote
"To avoid slow and arbitrary negotiations, I would recommend a mandatory recapitalization of all US banks based on current market values, coupled with strict laws prohibiting additional borrowing by banks and additional policies to drive down bank leverage further over time. If all US banks currently have a market cap of $2 trillion, $700 billion should buy a 25% stake in all banks across the board. "


This avoids the pricing problem of the Paulson plan. The market can not put a price on these toxic debts, so how is Treasury going to do it? If they pay too little, the problem is not solved. If Treasury pays too much, then the taxpayer loses out.

The stock market sets prices efficiently. Obrian0 makes great use of this to make a simple yet effective proposal.


Isn't this the approach Goldman Sachs took? Basically, sell some stock to raise some cash. And the market reaction was positive, shares of Goldman Sachs up 6% and Berkshire up 3%.
http://www.marketwatch.com/news/story/g ... teid=yhoof
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samurai sam
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"Mr. Risk Goes to Washington"

Post by samurai sam »

What Paulson is trying to fix he had a large hand in creating:

http://www.businessweek.com/magazine/co ... 988001.htm

"Goldman, under Paulson's leadership, became one of the greatest and most profitable risk-taking machines ever built. Since 1999, when he took over as sole CEO, Goldman has competed with bigger rivals such as Citigroup (C ) and JPMorgan Chase & Co. by being aggressive, making smart gambles, and putting the company's own money into deals. Paulson stresses Goldman's willingness to take risks along with clients in the latest annual report: "Investment banks are expected to commit more of their own capital when executing transactions.

The subject has become an obsession at Goldman: how to find profitable risks, how to control and monitor them, and how to avoid the catastrophic missteps that can bring down whole companies. That means taking on more debt: $100 billion in long-term debt in 2005, compared with about $20 billion in 1999. It means placing big bets on all sorts of exotic derivatives and other securities. And it means holding almost $50 billion in the piggy bank, enough cash and liquid securities to keep the firm going in the event of a financial crisis."

So no surprise Paulson has the best interests of Wall Street in mind. What would give this process a lot more credibility is if someone so beholden was at the tiller. But of course we're in "crisis mode", so a replacement is not an option.
'Conquer the self and you will conquer the opponent.' - Takuan Soho.
azxcvbnm321
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Post by azxcvbnm321 »

You guys make it sound like Paulson wants to do this or that Congress does either. It's like having heart surgery, you don't want to do it, but you have to do it.

How do I know? Look at the terms of the AIG "bailout". Not even the worst loan shark would charge you 80% of all you had just so that he could give you a 11% loan! Yet those were the terms of the AIG "bailout". AIG gave up 80% of the company for a $85 billion dollar line of credit at 8%+ over Libor, meaning 11%. What does that say?

1) Paulson really didn't want to "bailout" AIG.
2) Anyone who can get private financing better do so because if they turn down an offer from a private entity, they're not going to get a better deal from the government.
3) AIG was too big to fail, but the shareholders are going to get screwed regardless as they should.
4) Taxpayers deserve to make a profit for the risk they are taking. A profit on the AIG "bailout" is almost assured.


In that light, we should look at the $700 billion bailout. Warren Buffet said on CNBC that a buyer of these toxic assets stands to make 10-15% a year given the market prices he's seen recently. He believes that the taxpayer will make a good deal of money from this bailout.

He was asked why Berkshire wasn't buying. He said Berkshire couldn't afford to leverage up in this sort of environment, he said he would if he could put down 10% and borrow 90% at Fed Funds, but only the government can get money that cheaply and have unlimited leverage.

So here is the problem, 1) no one can afford to buy enough of these bad assets even though they are attractively priced. That is no one in the financial area, a Microsoft could, but they aren't in the financing business and neither is an Exxon-Mobil.

2) Most institutions are solvent, but having this toxic stuff makes it impossible to raise new equity without giving the firm away. Everyone is too afraid of more losses because of the toxic stuff.

So what if we can separate the toxic stuff from the rest of the company? If the company can get rid of ALL the bad stuff and take a huge loss, at least that will clear the way for new capital investments. Investors won't have to be afraid anymore of what could happen in the future. The slate is wiped clean, the firm can be evaluated on its future potential to make profits.

This is what Lehman was trying to do with the "good bank", "bad bank" strategy, but they ran out of time. Separate the cancer, take your losses, but at least the rest of the firm can finally function and borrow again. Most institutions like AIG are still profitable and solvent, but there is too much fear.
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tadamsmar
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Post by tadamsmar »

Here's why I think WB invested in Goldman

1. Goldman Sachs arranged shorts that, in effect, bet that home prices would decline. They were the only big 5 investment bank that did this. They did not have losses directly from the sub-prime mess.

2. The feds just ruled that these investment banks can get into traditional banking
FFR1608
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Post by FFR1608 »

Thanks tadamsmar

David
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samurai sam
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Post by samurai sam »

azxcvbnm321 wrote:You guys make it sound like Paulson wants to do this or that Congress does either. It's like having heart surgery, you don't want to do it, but you have to do it.

How do I know? Look at the terms of the AIG "bailout". Not even the worst loan shark would charge you 80% of all you had just so that he could give you a 11% loan! Yet those were the terms of the AIG "bailout". AIG gave up 80% of the company for a $85 billion dollar line of credit at 8%+ over Libor, meaning 11%. What does that say?

1) Paulson really didn't want to "bailout" AIG.
2) Anyone who can get private financing better do so because if they turn down an offer from a private entity, they're not going to get a better deal from the government.
3) AIG was too big to fail, but the shareholders are going to get screwed regardless as they should.
4) Taxpayers deserve to make a profit for the risk they are taking. A profit on the AIG "bailout" is almost assured.


In that light, we should look at the $700 billion bailout. Warren Buffet said on CNBC that a buyer of these toxic assets stands to make 10-15% a year given the market prices he's seen recently. He believes that the taxpayer will make a good deal of money from this bailout.

He was asked why Berkshire wasn't buying. He said Berkshire couldn't afford to leverage up in this sort of environment, he said he would if he could put down 10% and borrow 90% at Fed Funds, but only the government can get money that cheaply and have unlimited leverage.

So here is the problem, 1) no one can afford to buy enough of these bad assets even though they are attractively priced. That is no one in the financial area, a Microsoft could, but they aren't in the financing business and neither is an Exxon-Mobil.

2) Most institutions are solvent, but having this toxic stuff makes it impossible to raise new equity without giving the firm away. Everyone is too afraid of more losses because of the toxic stuff.

So what if we can separate the toxic stuff from the rest of the company? If the company can get rid of ALL the bad stuff and take a huge loss, at least that will clear the way for new capital investments. Investors won't have to be afraid anymore of what could happen in the future. The slate is wiped clean, the firm can be evaluated on its future potential to make profits.

This is what Lehman was trying to do with the "good bank", "bad bank" strategy, but they ran out of time. Separate the cancer, take your losses, but at least the rest of the firm can finally function and borrow again. Most institutions like AIG are still profitable and solvent, but there is too much fear.
Ok, but do you agree the govt. should get shares as collateral in case the toxic waste doesn't turn out to be as good a deal as Buffet says it will?
'Conquer the self and you will conquer the opponent.' - Takuan Soho.
superlight
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Post by superlight »

samurai sam wrote: Ok, but do you agree the govt. should get shares as collateral in case the toxic waste doesn't turn out to be as good a deal as Buffet says it will?
It's opaque to us. Some of these MBS will pay out 80 cents on the dollar, so buying them at 70 cents is a deal. Others, as I understand it, are unlikely to pay anything, so buying them at 10 cents is doing someone a favor.

It's all about the "tranches." Some tranches were written to hold essentially the worst slice of the worst loans ...
"Simplicity is the ultimate sophistication."
bookshot
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Post by bookshot »

It's unlikely that any of the solutions being contemplated are perfect. But the perfect is the enemy of the good. The only issues are (1) whether government intervention is necessary to avoid economic calamity and (2) whether the solution chosen is effective and sufficient.
To all the market-worshipping skeptics: The markets are apparently telling you unequivocally that the answer to (1) is yes.
If the government had not stepped in, Treasuries would be at 0%, corporate MMs would be at 10% and the stock market would be in free fall. What would that be telling you?
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Taylor Larimore
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Henry Paulson's views on bailout of banks

Post by Taylor Larimore »

Hi Bogleheads:

In my opinion, Mr. Paulson probably knows more about the need for a "bailout" than anyone. I also feel comfortable with his integrity. So, let's look at his record regarding this huge bailout of banks by the taxpayers:

On February 27, he said:

"I don't think..the American taxpayer needs to be stepping in with more taxpayer dollars..We are so far away from seeing something that would have me calling for a bailout that I don't see it."


On May 6, he said:

"There's no doubt that things feel better today, by a lot, than they did in March..The worst is likely to be behind us.."


On July 20, he said:

"..It's a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation."


On September 18 he said:

"If [the $700 billion bailout] doesn't pass, then heaven help us all."

(Quotes are from Wall Street Journal 9-25-08.)

Conclusion: If Wall Street and government experts can't predict what's ahead, I am sure that I can't.

Diversify and stay-the-course.

Best wishes.
Taylor
Jack
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Re: Henry Paulson's views on bailout of banks

Post by Jack »

I don't know, Taylor. You give us a bunch of quotes indicating that Paulson doesn't have a clue what is going on and then you conclude that means we should trust him with 700 billion taxpayer dollars.

And regarding his integrity, I think Paul Krugman said it best:

Daniel Davies, in one of the great blog posts of this era, laid down a key principle:

Good ideas do not need lots of lies told about them in order to gain public acceptance.

He was talking about the selling of the Iraq war, but it applies more generally.

So, this morning Hank Paulson told a whopper:

"We gave you a simple, three-page legislative outline and I thought it would have been presumptuous for us on that outline to come up with an oversight mechanism. That’s the role of Congress, that’s something we’re going to work on together. So if any of you felt that I didn’t believe that we needed oversight: I believe we need oversight. We need oversight."

What the proposal actually did, of course, was explicitly rule out any oversight, plus grant immunity from future review:

"Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

I’m not playing gotcha here. This is telling: if Paulson can’t be honest about what he himself sent to Congress — if he not only made an incredible power grab, but is now engaged in black-is-white claims that he didn’t — there is no reason to trust him on anything related to his bailout plan.
If he goes before congress and makes such a blatant lie about his plan, how can we trust him.
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Taylor Larimore
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Misquote

Post by Taylor Larimore »

Hi Jack:

You give us a bunch of quotes indicating that Paulson doesn't have a clue what is going on and then you conclude that means we should trust him with 700 billion taxpayer dollars.


You are misquoting me. This is what I wrote:

"Conclusion: If Wall Street and government experts can't predict what's ahead, I am sure that I can't."


Best wishes.
Taylor
Jack
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Post by Jack »

Taylor, you testified to Paulson's integrity which I interpreted to mean that we should trust his judgment on the bailout. If that is not what you meant, I apologize for misunderstanding.
grumel
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Post by grumel »

Its part of a politicians job to lie. Kind of normal for them to say different things all the time. So his public quotes are not a good basis to conclude he doesnt know whats really going on.
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Post by bookshot »

I'm less inclined to worry about his integrity than his judgment. He has little reason to lie but grasping the problem let alone all the implications of a possible solution and its implementation is another matter, possibly beyond the capability of mere mortals. (OK, he might exaggerate a bit to get something passed, but one has to assume he is acting in basic good faith.)
Jack
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Post by Jack »

bookshot wrote:I'm less inclined to worry about his integrity than his judgment. He has little reason to lie but grasping the problem let alone all the implications of a possible solution and its implementation is another matter, possibly beyond the capability of mere mortals. (OK, he might exaggerate a bit to get something passed, but one has to assume he is acting in basic good faith.)
I could not disagree more. As Daniel Davies said in the quote above:

"Good ideas do not need lots of lies told about them in order to gain public acceptance."

The entire problem in the economy is lack of confidence. Trust is the only thing Paulson has to sell. If Paulson squanders away his integrity in some cheap political lies, then he has nothing to offer.

[Political comments removed]
bookshot
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Post by bookshot »

I will stay away from the Iraq analogy, as it is irrelevant and clearly a political issue.
It's quite clear to me that there are enormous immediate dangers posed by the credit meltdown. The markets and most neutral observers are telling us the same story. Few people, even those who want the feds to stay out of it, dispute that the problem is severe.
Given the urgent and dire situation, of course Paulson would have liked a blank check, and now he has backed off. So what? But if he's lying on substantive matters I suppose the fed chairman and every congressional leader who are all going along with it are either fools or fellow liars. And what are their motives?
Jack
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Post by Jack »

bookshot wrote:But if he's lying on substantive matters I suppose the fed chairman and every congressional leader who are all going along with it are either fools or fellow liars.
You prove my point. That is exactly what people said last time. How quickly everyone forgets.
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Post by samurai sam »

bookshot wrote:I will stay away from the Iraq analogy, as it is irrelevant and clearly a political issue.
It's quite clear to me that there are enormous immediate dangers posed by the credit meltdown. The markets and most neutral observers are telling us the same story. Few people, even those who want the feds to stay out of it, dispute that the problem is severe.
Given the urgent and dire situation, of course Paulson would have liked a blank check, and now he has backed off. So what? But if he's lying on substantive matters I suppose the fed chairman and every congressional leader who are all going along with it are either fools or fellow liars. And what are their motives?
To keep everyone from bailing? To avoid presiding over the worst disaster since the depression? Seems like pretty good motives to lie. Heck I would. If they're truly staring into the abyss, what do they have to lose by lying. Telling the truth sounds good, but would it help? If they truly don't know the magnitude of the problem ( and they apparently don't ), and really don't have good handle on how to fix it, what would be served by saying so? Would you feel better if they said so? Would the markets? I have little faith at this point that they do know what to do about this, they're winging it. However, the alternative is what? Move to another country cause if there's a real meltdown it won't matter much what you do short of that.
'Conquer the self and you will conquer the opponent.' - Takuan Soho.
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Re: Buffet Convined Me

Post by kmurp »

jaxbmw wrote:This morning I heard Buffet on CNBC and his voice wavered when he discussed last Thursday. This problem is real.

The markets are stuck and anything that goes to help them clear I am for
I heard the interview as well. I also felt that his voice got unsteady when he described last week's events. Why the Congress of this country wouldn't listen to this man is truly beyond me. I guess that a few business courses that they took in college along with ideology is all they have to guide them.
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Arbez
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Post by Arbez »

Another take on the problem. I heard from 2 sources today (Robert Litan on biz.yahoo.com and Dylan Ratigan on MSNBC) that what is needed is a market for some mortgage-based securities.

problem: Complex derivatives, default uncertainty, and opaque accounting rules have made valuing many mortgage-based securities impossible. This has led to a market collapse for those securities. Banks being forced to mark-to-market these securities are facing a capital shortfall. These banks do not have the resources to lend, and so are creating a credit crunch.


http://biz.yahoo.com/ap/080926/bailout_ ... eview.html

--political comment deleted--
"Robert Litan, an expert on banking and finance at the Brookings Institution, called the framework unworkable, saying it would not achieve the basic goal of creating a market -- and establishing prices -- for mortgage securities no one's willing to buy."
azxcvbnm321
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Post by azxcvbnm321 »

Why do you take PR statements for anything other than BS? There is no way Paulson or Bernanke can make public what they really think because it would do a lot of harm, remember, confidence is a key component of our financial system.

Remember how Bernanke was pounded at the beginning of his term when he spoke too directly? A determination of their competence has to depend on their actions, not their words. If they didn't know what the hell was going on, they would not have asked for the bailout weeks ago. A clueless person would try to react and be very late in doing so. Paulson and Bernanke have done their best to stay ahead, look at the moves the FED has made in accepting new forms of collateral and expanding lending. That's evidence that they do understand what is going on.

You should view the public statements of Paulson and Bernanke like you would a coach of a sports team. We all know there are teams that absolutely have NO CHANCE of winning their division much less a championship. Yet why don't coaches come out and say that the team has no chance and that he feels fortunate when he can win a game? That the team can only win if the other team is asleep because the players have no talent and don't work hard? That the team is rebuilding so winning is irrelevant, talent development is the most important thing right now? How come you don't expect coaches to come out and admit they are surprised anytime the team wins? Because that would be harmful. So the coach goes into the usual BS coach speak about how they are trying hard and taking it "one game at a time". Paulson's statements should be viewed in the same light. It is his duty to say that everything is OK if there is no obvious crisis, and in an obvious crisis, he should try to sound positive by saying the underlying economy is sound, or something like that. It's the equivalent of "one game at a time".
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