Does anyone understand the bailout?

[CLite]

I'm an mechanical engineer by profession who detests wallstreet and believes they don't contribute anything to society. However.....

The reason the banks are failing is that they have to write down these mortage packages 10-15 cents on the dollar. This is "highly" undervalueing these packages which do suck, but not as badly as they are writing them down. The reason they are so undervalued is no one wants to lend to one another and everyone is scared.

The U.S. government can buy these packages, wait for consumer fears to alleviate and easily get returns on the order of ~40 cents on the dollar. The US government will make trillions of dollars off of their 700$ billion dollar investment.

The problem is the post-Enron rule that required quartely accounting to write down assests at market value. The market value on the securities is so out of whack because absolutely no one wants to buy them. In a year or two these securities will rebound significantly, however with the lifting of the uptick rule on short selling people made enormous runs on the banks once they starting writing down these assests.

So you have failing banks, highly undervalued securities, and an opportunity to make buttloads of money if you can float the capital. Warren Buffet is already cashing in with his 5$ billion infusion into Goldman Saches, please don't try to believe it was an altruisitic move. The government can do the same thing with 700$ billion and make so much money that we could start making a stab at our horrific deficit.

 

[fleshconsumed]

Originally posted by: CLite
. . .
The government can do the same thing with 700$ billion and make so much money that we could start making a stab at our horrific deficit.

This is all assuming those obligations are going to be bought at 10-15 cents on a dollar, which is probably not true. The going price is probably going to be much higher, otherwise there wouldn't be any sense in doing it.

 

[StageLeft]

The US government will make trillions of dollars off of their 700$ billion dollar investment.

HAHAHAHAHAHAH

OH MY HAHAHAHAHA

How do you believe this? If they could make trillions you don't think some other banks with the cash would get together and foot the $700B themselves? These are junk loans, they truly are worth cents on the dollar.

The government can do the same thing with 700$ billion and make so much money that we could start making a stab at our horrific deficit.

lawls ad infinitum.

 

[CLite]

Excellent point, though it is a misconception imo. These companies are hindered by illiquidity, by selling off the securities at the value they have marked them down to you infuse liquidity into the companies. This helps their ability to raise credit. However I do somewhat agree, they might be sold for slightly higher than what they are marked down to, but still below what they should be valued at. But be assured that it benefits the companies to sell off the illiquid securities at their marked down price to raise liquidity.

note: for those not inclined to follow economics illiquid just means something that can't be readily exchanged for money.

 

[OrByte]

Originally posted by: CLite
Excellent point, though it is a misconception imo. These companies are hindered by illiquidity, by selling off the securities at the value they have marked them down to you infuse liquidity into the companies. This helps their ability to raise credit. However I do somewhat agree, they might be sold for slightly higher than what they are marked down to, but still below what they should be valued at. But be assured that it benefits the companies to sell off the illiquid securities at their marked down price to raise liquidity.

note: for those not inclined to follow economics illiquid just means something that can't be readily exchanged for money.

all of this coming from a mechanical engineer?



I jest.

 

[CLite]

Skoorb:
Warren Buffet is banking 5 billion on junk loans he's a hell of a lot smarter than you, sorry if that is insulting to you.

We are talking about a spread of loans covering the entire US, in general enough people are going to be paying their loans to make the current write downs entirely reasonable. Yes wall street highly overvalued how many would pay the loans, but once you start hitting 20 cents on the dollar you will begin getting returns.

 

[CLite]

Haha OrByte, if you want to get into discussions on ASME B31.3 piping code, which is what I mainly work in I'd be willing to bore the masses. But I do moonlight in trying to find stocks highly undervalued by media/wall street herd mentality and make decent money from it.

 

[TheDoc9]

Warren Buffet making sound investments != Federal Gov. doing the same.

The perfect situation the op presented sounds wonderful, in fact it sounds too good to be true and that means it is.

In any case 5 billion to a person who has 50 billion is nothing. And for all we know the money is going to something else.

 

[CLite]

You do realize the government has done bailouts in the past that have resulted in profits? right? The Savings and loans bailout in the 80's.... president clinton recently mentioned his bailout of chrystler and mexico that resulted in profit via interest.

People are just too highly cynical of our government's ability to strong arm desperate people into sellouts that are profitable for us. If our congress has the gusto to work these deals in a manner that benefits us we will make quite a hefty profit.

 

[scruffypup]

Noone can understand it when they have not decided exactly what they are going to do,... but the principle behind it is to relieve worries and anxiety that the banking system has to lend money (they have it, but are scared to use it).

If the government removes what is causing the main worry, theory holds that the money will start to flow better in our banking system again, which in turn is what an economy runs on. Once that flows, the pressure on Wall St is relieved. Once those pressures are off, the media quits proclaiming to the masses that the sky is falling, consumer confidence rises, etc, etc.

The government might make money, might lose money. They shouldn't have a tremendous profit if they make money, since they would never get full value on this, and it will take time, which inherently eats at the value due to inflation and such. They could lose some money, though shouldn't lose everything since it is undervalued, but a good chunk of it could still become worthless altogether. My guess would be 50% to 150% range, though knowing the government I would error slightly on the under 100%.

It is something that in principle based on what Bush wants to do makes sense.

The economy will go on if we don't do this, however we will have some major bumps and bruises and be in this "funk" for a longer period, possibly a recession or slight depression. We still shouldn't have a "Great Depression" situation, however there would be more consolidation into a few large banks which would be scary for the consumer later in my opinion - fewer choices for loans, interest bearing accounts means the leverage for these greatly increase in the banks favor, among other things.

If we do this, it should release a lot of anxiety, create a quicker path to having the economy move forward and not be anemic. The scary part of this is the government is already too large and putting more power and centralization in the hands of the Federal government in conjunction with a strong push going on in this country of becoming more socialist,.... scares the crap out of me.

The main question about this theory is how quickly the banking system reacts and how quickly it ripples through, because if it takes too long, there can still be issues that arise, which may disrupt this and we will be back near the same situation with the exception that the government now holds more of the economy in their hands.

Disclaimer - I stopped just short of completing my dual degree in Electrical and Computer Engineering, went into insurance and now am associated with stocks, securities, retirement accounts, etc. I don't detest Wall St. as it is American capitalism and freedom of individuals at its core, which is America itself in my opinion. I agree they don't produce a product that is meaningful in typical daily life as a good engineer can (for instance , if you were stranded on a deserted island - would you want any kind of engineer or a stock broker with you - barring one of which being a beautiful woman, which might alter decision making)

 

[ElFenix]

Originally posted by: Skoorb

How do you believe this? If they could make trillions you don't think some other banks with the cash would get together and foot the $700B themselves? These are junk loans, they truly are worth cents on the dollar.

The government can do the same thing with 700$ billion and make so much money that we could start making a stab at our horrific deficit.

lawls ad infinitum.

where do they borrow the $700 billion from? that's why no one else has done it. they can't get the money. if the gov't does it they can unwind the securities back into mortgages and make $$$. the underlying assets are worth way more than these securities are.

 

[smack Down]

Originally posted by: CLite
Skoorb:
Warren Buffet is banking 5 billion on junk loans he's a hell of a lot smarter than you, sorry if that is insulting to you.

We are talking about a spread of loans covering the entire US, in general enough people are going to be paying their loans to make the current write downs entirely reasonable. Yes wall street highly overvalued how many would pay the loans, but once you start hitting 20 cents on the dollar you will begin getting returns.

Warren Buffer bet 5 billion on the bail out happening.

 

[dullard]

Ge ahead and buy your steaming pile of crap for 40 cents. In the end, you still have a worthless (but now cold) pile of crap.

The government won't lose all of the $700B (some payments will be made on some loans, and the foreclosed houses usually have some value). But it is quite unbelievable that anyone can actually make money buying unwanted toxic loans made to people who CAN'T pay you back. That includes the government. That is especially true once you think about the interest the government will have to pay and the fact that investors will rather buy the $700B of newly issued government bonds than buy back the remaining bank securities.

Buffet bet on the government actions. He did not bet that the toxic waste is valuable. There is a very subtle but important difference.

 

[CLite]

Originally posted by: dullard
Ge ahead and buy your steaming pile of crap for 40 cents. In the end, you still have a worthless (but now cold) pile of crap.

Ok first of all I said in general the securities should be bought for 20 cents on the dollar, obviously this varies by region. Current subprime foreclosure rate is 2.43%, projected in localized areas can easily reach 30% , but nation wide no one is betting on more than 4% or so. Your insinuation of the securities being a steaming pile of crap would be much more credible if you provided an argument to that. There are tangible mortgages backing these securities that for the most part are being paid. Please research national subprime mortgage foreclosure rates before answering with a basis counter argument to this statement please (hint the media is blowing the foreclosure rate far out of proportion leading to the sheep on wallstreet undervaluing the securities, leading to short seller run on banks, leading to golden opportunity for U.S. gov to make money).

The following counter point to my original arguments would suffice as an argument as opposed to the baseless opinionated arguments I have seen so far:
One could hypothesize that this credit crisis will lead to a seizing of the credit market. This would hinder company expansion and at the same time lead to the weakening of the U.S. market in general. This could deter foreign investment which weakens the U.S. dollar which would increase costs in goods that lead to development (i.e. construction materials/fuel/energy costs). This in turn would further hamper business expansion leading to a job crisis. Of course all this would be partially offset by increased foreign interest in U.S. goods due to the devalued dollar, but let?s ignore this for a moment. The job crisis and the spiraling lack of credit being issued would lead to a completely collapsed housing market in which case the securities would be worth cents on the dollar.


The above is an entirely reasonable argument to make. However, I personally believe the credit industry won't collapse as hard, and also I believe a weakened U.S. dollar would significantly help exports of U.S. goods, enough to balance increased energy costs. However unfortunately in this thread I have yet to see reasoned argument (besides scruffypup, interesting thoughts) beyond a deep rooted & misinformed belief of the utter worthlessness of these securities.

 

[Fern]

Does anyone understand the bailout?

I don't think so, but I do hope that before proceeding to the solution Congress gains a very clear understanding of the problem and what led to it.

I'm not hopeful.

I'm seeing a lot of partisan spin here and on Capital Hill.

I've read that Paulson's plan was 3 pages long, but very technical and skimpy on details. It's dificult to see how many would be bale to understand given those facts.

Worse, I read that Paulson & Bernanke see this as more a psychological problem; that's far more *art than science*, and terribly difficult to quantify and/or forsee future results.

The partisan spin is highly annoying. Despite assertions by Schumer and other Dems (including those here) I see no evidence that any agreement was reached prior to McCain's arrival. I've read that after meeting privately with Paulson damn few Repub Congresspersons supported Paulson's plan. There's been no agreement. This bail-out is highly unpopular among the electorate - both Conservative and Liberal. The House is far more sensitive to this (as was intended by the Founding Fathers when they created our system of goverment).

So, getting something passed in the House looks to be very difficult.

Where are we now? As best I can tell we have Paulson's plan that is now dead.

We have the Dem's suggested revisions to the Paulson Plan, many of which seemed like good ideas, at least as outlined by Barney Frank. But since the Paulson Plan is dead these now become *concepts* for possible inclusion in a new plan yet to be developed

We have (apparently) strong opposition by many House members, some of which have proposed alternatives faaar apart from what Paulson recommended.

And we have far too much injection of partisan politics. I think the debates should have been postponed; Obama and McCain are, for now at least, the leaders of their parties and need to help lead in efforts to craft a solution. Debates require travel and prep, all time away from this task. Otherwise, might have been far more telling to see how McCain & Obama performed with this *real* crisis instead of empty rhetoric up on stage.

I'm also fearful of *crap* that gets squeezed into these bills while no one's watching. I fearful of poorly written legislation, leaving loopholes and uncertainties likely to be exploited later. They need to take their time, focus on this and it get it done right. I don't like the *rushed* sensation I'm seeing in this the process.

So, "Does anyone understand the bailout?" - the answer is no because as things stand now we don't have a plan; thus there is nothing to understand aside from the process and it's progress (very little apparently).

Fern

 

[BoberFett]

Originally posted by: ElFenix

Originally posted by: Skoorb

How do you believe this? If they could make trillions you don't think some other banks with the cash would get together and foot the $700B themselves? These are junk loans, they truly are worth cents on the dollar.

The government can do the same thing with 700$ billion and make so much money that we could start making a stab at our horrific deficit.

lawls ad infinitum.

where do they borrow the $700 billion from? that's why no one else has done it. they can't get the money. if the gov't does it they can unwind the securities back into mortgages and make $$$. the underlying assets are worth way more than these securities are.

*psssssst* The US government doesn't have the money either. Why do you think they call it the national debt?

 

[Muse]

Originally posted by: TheDoc9
Warren Buffet making sound investments != Federal Gov. doing the same.

The perfect situation the op presented sounds wonderful, in fact it sounds too good to be true and that means it is.

In any case 5 billion to a person who has 50 billion is nothing. And for all we know the money is going to something else.

Buffett, AFAIK, just bought a $5,000,000,000 stake in Goldman Sachs, who are regarded as the best of the best of Wall Street. Even their stock has been hard hit, though not as hard as some. He figures that when the foot is off the financial sector's neck, the stock will rise and he'll make billions. That's my view of it.

 

[boredhokie]

Originally posted by: CLite
Skoorb:
Warren Buffet is banking 5 billion on junk loans he's a hell of a lot smarter than you, sorry if that is insulting to you.

We are talking about a spread of loans covering the entire US, in general enough people are going to be paying their loans to make the current write downs entirely reasonable. Yes wall street highly overvalued how many would pay the loans, but once you start hitting 20 cents on the dollar you will begin getting returns.

Do you work in Financial Services? You really have no idea what you're talking about when you say that there are enough prime loans to cover the subprimes - if this were true then we wouldn't be in the mess we're in now.

Banks over-leveraged themselves underwriting shitty loans, or investing in CDO's in the market that were poorly evaluated by ratings agencies.

As loans readjust, foreclosures rise, reducing the capital these underwriting institutions have to continue operations.

Combined with the weak dollar, shitty economy and other factors, who on earth would buy these houses for "a profit"? How would they pay for them if nobody is giving out loans?

Your logic is faulty and makes a lot of fallacious conclusions - I hope you aren't engineering anything that people rely on.

 

[boredhokie]

Originally posted by: Muse

Originally posted by: TheDoc9
Warren Buffet making sound investments != Federal Gov. doing the same.

The perfect situation the op presented sounds wonderful, in fact it sounds too good to be true and that means it is.

In any case 5 billion to a person who has 50 billion is nothing. And for all we know the money is going to something else.

Buffett, AFAIK, just bought a $5,000,000,000 stake in Goldman Sachs, who are regarded as the best of the best of Wall Street. Even their stock has been hard hit, though not as hard as some. He figures that when the foot is off the financial sector's neck, the stock will rise and he'll make billions. That's my view of it.

Goldman will be fine - they are heavily diversified and actually wrote off a lot of their mortgage exposure.

 

[Thump553]

Originally posted by: Fern
* * *
I've read that Paulson's plan was 3 pages long, but very technical and skimpy on details. It's dificult to see how many would be bale to understand given those facts.
* * *

I'm too lazy to look it up tonight, but sometime if you have a chance you should really look up the original Paulson/Bernake proposal. Seeing the actual proposal will go a long way towards explaining the revolt from all sides in the legislative branch. There was NO technical language. It was basically an outline sketched on a lunch napkin. Frankly it looked like those papers you did in seventh grade English when the teacher said I want a three page report by Monday. The initial proposal was very sparse, it literally was a very vague statement of purpose, a vesting of power in the Sec of Treasury, a prohibition of judicial or administrative review, no oversight provisions at all, an increase in the debt ceiling by $700B, and finally a blank check to the Sec. of Treasury. That literally was the sum and substance of the proposal. Frankly I can easily see why at least some legislators thought it was an insult. I saw the need for the bailout at the time and I was outraged at that proposed "bill."

Incidentally, don't feel bad about not reading the original Paulson proposal. As of late Tuesday McCain admitted in an interview he hadn't read it either, even though it's a five minute read tops.

* * *
Where are we now? As best I can tell we have Paulson's plan that is now dead.

We have the Dem's suggested revisions to the Paulson Plan, many of which seemed like good ideas, at least as outlined by Barney Frank. But since the Paulson Plan is dead these now become *concepts* for possible inclusion in a new plan yet to be developed * * *

Mostly correct but not completely accurate. By Thursday morning it looked like everyone had agreed on a much fleshed out version of the Paulson plan. Critical oversight and transparency language was added. The ability to rein in executive's pay (a critically important feature for political purposes) was included. Giving taxholders an equity position in the companies participating in the bailout, at least under certain circumstances was a great addition. The Dems were seeking the ability to cram down mortgages in bankruptcy for the homeowners (part of the bankruptcy law for approximately 100 years until the bankruptcy "reform" act adopted in Bush's first term) but that looked stalled out. No one was really happy but there was a legit bipartisan effort to accomplish a mutually tolerable result.

Then McCain pulled his parachuting in stunt and stirred up a segment of the House GOP who revolted against the plan. It all blew up at the White House meeting that was really intended to be a photo op for McCain. The House GOP rebels wanted something totally different-an insurance plan paid for by the Wall Street banks (how I don't know), deregulation (?? I don't know what drugs they were on), elimination of all capital gains taxes for two years to encourage private investment (ie, an outright giveaway) and a lessening of corporate tax rates. That's what blew the thing up yesterday. Paulson and Bernake said that wouldn't work, and the Dems basically said this is all new to us.

I just watched an interview of the architect of the House GOP rebel plan on CNBC. Fortunately he does not appear to to be the Ron Paul type fanatic I was worried about. While he didn't expressly state it I got the strong impression that (1) he and his backers now realize their plan is a nonstarter and (2) they will support the general consensus plan if it incorporates some of their language. Apparently the staffs are working on that now.

Many years ago Otto Von Bismarck said "Laws are like sausages. It's best not to see them being made." His point has been re-proven this week.

 

[StageLeft]

Originally posted by: CLite
Skoorb:
Warren Buffet is banking 5 billion on junk loans he's a hell of a lot smarter than you, sorry if that is insulting to you.

We are talking about a spread of loans covering the entire US, in general enough people are going to be paying their loans to make the current write downs entirely reasonable. Yes wall street highly overvalued how many would pay the loans, but once you start hitting 20 cents on the dollar you will begin getting returns.

Not insulting; you merely prooved my point. There is money available. Let those who are actually responsible for it spend it as they see fit. Buffet sees potential gain. If there was gain in the toxic $700B, he or others would be buying it as well.

Warren Buffet making sound investments != Federal Gov. doing the same.

QFT

where do they borrow the $700 billion from? that's why no one else has done it. they can't get the money.

You are really telling me that in the entire planet with annual GDP among all countries in the tens of trillions nobody can come up with $700B except the US gov for what we are supposed to believe is actually going to give a positive ROI? I am not buying it.

 

[CLite]

Originally posted by: boredhokie


Do you work in Financial Services? You really have no idea what you're talking about when you say that there are enough prime loans to cover the subprimes - if this were true then we wouldn't be in the mess we're in now.
.......
Your logic is faulty and makes a lot of fallacious conclusions - I hope you aren't engineering anything that people rely on.

First of all I have always had very satisfied clients regarding my engineering consulting. I am very well versed in engineering fundamentals and find your insults laughable. If you wish to discuss engineering, code compliance, and reliablity of existing structures/design of new structures please start a new thread I'd be perfectly happy to engage in a discussion with you. It's one thing to disagree with my outlook on how the U.S. government could benefit from what I see as an opportunity. You could insult my belief in economics and I would counter your argument. However you seem to take my beliefs personally and take it beyond economics, ok, your a moron.

The foreclosure rate on subprime loans, not prime loans, is only 2.43% currently. Getting securities packages for 20 cents on the dollar (depending on the region) will be a net profit, even if foreclosure rates increase. My logic is not faulty, assuming the purchase of the securities uses sound fundamentalls there is an opportunity for profit and people with the ability the float the capital will make profits.

Originally posted by: Skoorb
You are really telling me that in the entire planet with annual GDP among all countries in the tens of trillions nobody can come up with $700B except the US gov for what we are supposed to believe is actually going to give a positive ROI? I am not buying it.

Please look up home saving and loans. please look up the chrystler loan, please look up the mexico emergency loan. All of these loans by the government have produced ROI. Just because GWB is a moron doesn't mean the government always does wrong. Do some research, there are opportunities where the government has benefited from loans. People are sheep, consumer confidence is king, in situations where one is shitty and the other is baaaa'''iiiinngg, the government can float capital and make out like a bandit it's happened before bud.

Look I don't give 2 shits about wallstreet, my only involvement is I dick around on Etrade looking for good buys because I believe the media and wallstreet in general are sheep and follow trends too religiously. I truly believe the government can make a good profit here over the next 3-6 years by wisely investing the 700$ billion. The wise investment has been done in the past succesfully. To deny that in the past the government has made profit via loans/takeovers is simply ignorant and shows your lack of knowledge regarding history.

 

[StageLeft]

Well, I hope you're right. I am right enough of the time (hey, it's the interwebs, I can say that!) that being wrong about something so important is definitely ok with me. I think that a government ambushed at the 59th minute of the 11th hour by this is not a competent one and one in command of the fundamental issues, so I find it unlikely they can successfully invest $700B, but maybe they'll get it right this time.

 

[CLite]

Yeah man that's all we can hope for. Hope I didn't personally offend you in my posts, I just expressing my thoughts on how we could benefit from the purchases.

 

[Blackjack200]

Originally posted by: CLite
Yeah man that's all we can hope for. Hope I didn't personally offend you in my posts, I just expressing my thoughts on how we could benefit from the purchases.

It's possible that we could benefit from these investments. But it would probably not be a large profit, and it would probably take years to realize. The banks cannot sell these things at $.20 on the dollar, they would go bankrupt doing that. They're unlikely to sell them for anything under $.65 to $.70 on the dollar, the problem is that a lot of the loans were negative amortizing loans, which means that they were written for more than the property was worth back at the height of the boom. So now you have that property value falling 35% to 40% (analyst estimates) from their high point, and that underlying property is only worth 55% to 60% of what the loan is written for.

Another problem is that the banks are not going to see their performing loans, they're going to sell their non-performing loans. So the government is going to get adverse selection.

All said, we still don't know the specifics of the package, we don't know how much the government is going to pay for this stuff, we don't know how soon the RE market will turn around and we don't know how long the Government will hold the assets for. I think it's a little premature to predict that the Gov't will profit, but I think it's fair to point out that the Gov't will likely make back at least most of it's money, and may do better.