Hey David, good choice, that was a pretty good summary. Few articles have managed to convey anything useful at all about the actual financial mechanics of the likely bailout.
Here are my thoughts so far on what’s been going on:
– The CEO pay thing should be a non-issue, and most Wall Streeters I know have no problem with it. What I’d like to see is senior execs stepping up on their own to forego pay in the interest of the common good, following the lead of ex-AIG CEO Robert Willumstad, a guy I know personally, honest solid citizen, got left holding an impossible bag, got canned in the AIG bailout, and said, “No thanks. Keep the severance.”
– I can’t stand either Schumer or Franks, but you know what, they’ve been steady hands so far. I have also been impressed by generally more financial savvy than I expected at these hearings.
– This is not a Wall Street bailout, in the sense that it is not a giveaway to the people who piled this stuff up at our financial institutions. Most of the pilers are long gone, having resigned or been fired. You have to go to mansions and resorts to find them — they ain’t in the southern half of Manhattan these days.
– I’d be stunned if the gov’t didn’t end up making money on this. If they price this stuff roughly half-way between “fire sale” and “hold to maturity” prices, it’s a win all around. Bank marks are closer to fire sale, and the midpoint/HTM spread provides for a tidy profit, ultimately, for the taxpayers. The equity upside is not an unfair thing to be talking about, but it would be extremely hard to size, and would likely deter some participants. Asset pricing is a better mechanism for creating taxpayer upside, in my opinion, and there is a lot of space (as the NYT article points out) between fire sale and HTM.
– It’s very likely nothing near the $700 billski gets used. More likely, it’s buy, sell, use proceeds for next buy. Bernanke put it best today… how much money we have to show we’ll commit isn’t a matter of economics, it’s psychology.
– Paulson is my hero, but he’s been ineffective at the hearings. Frankly, I think he’s just exhausted physically. Bernanke, on the other hand, has been simply fabulous and has gone up about 10 pegs in my book. Thank the dear Lord we had this duo at the wheel instead of Greenspan, and either O’Neill or Snow. God must love America after all.
I’m optimistic we’ll have a reasonable deal on the table before the markets open on Monday.
Now get ready for Granulous to explain to us how we’ve squandered the pelts and giant rocks with holes in the middle — real “money” — that we could have used to pay attorneys instead of somehow bailing out the people “who did this” who aren’t employed at their Wall Street firms any more. Because things really do work that way — money is a totally real and independent concept, and its value remains perfectly constant if the country that prints that money collapses due to a crisis in confidence.
One of the things which concerns me about how Paulson is selling this is that he is really giving the public only half the story. I think what finally drove him to the MBS bailout plan was the final realization last week that the crisis had morphed from one of liquidity to one of capital. The Secretary realized after AIG that unless he could come up with a way for new capital to flow into the financial system, the whiole house of cards would come tumbling down and that not even the federal balance sheet could be stretched to bailout everyone on a case-by-case basis. Paulson seems to be banking on the fact that if the government can remove the black holes in the financials’ balance sheets caused by holding toxic assets, private capital will flow back into the system, making it possible for banks to lend confidently again.
In theory it makes sense, and the Buffet investment in GS gives me some confidence. However, I think the American taxpayer migt feel a bit blindsided if the government is holding assets it can’t sell and the new equity for the banks doesn’t show up. I also think that the government will have to provide direct relief to mortgage borrowers to stabilize the default rate on the the MBS before they can make a real market in the paper.
David, what kind of attorney are you? Securities? You know your stuff.
Let me put just one wild card out there — that markdowns on the toxic stuff were really most of the way there before this panic. Before this all started, I was just hoping we could get through September without a panic because Q3 earnings, although hardly wonderful, would show that almost all of the expected pain had been taken.
Then the panic threatened to change all that because the fire sale was turning into a wild fire. But with the bailout on the horizon, asset marks as of 9/30 will not be bad, the financials will do so-so in Q3 (beating expectations by a mile), and that will help restore some confidence as well.
One important fact that got lost in all this is that both Morgan Stanley and Goldman did ok in their Q3 reports in September — Goldman beat by a little, and MS crushed it. We were getting to the end of this before the shorts got into the GSEs and Lehman. It’s so hard to fight those bear raids when Sarbanes-Oxley has everyone gagged.
The best thing the gov’t could do would be to facilitate refinances into 30-year fixed mortgages. This would stabilize home budgets, but more importantly, begin liquidating all these toxic securities by resolving underlying mortgages. If reductions to balances outstanding are included, all the better. Getting mortgages rolled into fixed rates and performing is the key to success and stability.
This paper is marked down so far now that any ameliorations are going to be wins for the banks.
Clearly, once the government buys the MBS I think they are going to have to restructure the underlying mortgages in order to make a market. I take your point that new paper with 30 year fixed mortgages underlying it will be a very attractive prospect for the distressed debt buyers who remain on the sidelines. However, the defaulting households are so stretched and so dependent on their initial “teaser” rates that the government will either (i) have to eat a huge chunk of the increased interest costs of the underlying mortgages or, (ii) perhaps, extend the mortgages to a 40 year maturity. The later option will result in less real cash out of the Treasury but will obviously negatively impact the resale value of the MBS supported by the longer term mortgages.
In any event, I think the taxpayer needs to understand that he will be asked to do more than the $700 bn commitment in order to right the ship. Not honestly discussing this is a recipe for a lack of confidence.
I completely agree on extending mortages, and i believe truthfully that the taxpayers will not intially be optimistic to them fulfilling there comittment. but on the other hand The best thing the gov’t could do would be to facilitate refinances like you said and stabilize home budgets so citizens can be confident.