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« Lehman = Pan Am | Main | Radio, Radio: NPR and Rush »

September 25, 2008



It boils down to this "Government stay solvent a lot longer then the markets can stay irrational" So the trade is to hold this portfolio til the market recovers and with banks having less of this junk marked to market on today's valuations, could actually lend and restart the economy and Uncle Sam that doesn't need equity/capital injunctions can sit on these loans til the market is higher then what's being marked today.

How about this solution : Tell FASB/SEC/Treasury or whoever runs the show now, to ask for injunction on mark-to-market on these portfolios. Since there wont' be a decrease in value of these "Assets" there won't be a need for banks/thrifts/insurance companies to raise capital to keep the liquidity in balance. No need to raise cash, no need to dump these "assets" on the street and we can have some stability. Since these assets would be treated as off-balance sheet, the banks can about doing what they do best making money out of leveraging their cash. We the taxpayers won't have to foot the $700b and the market won't be innudated with these toxic loans. Yea but the Paulson (who worked for one of the best I-banks Goldman) won't get to make the trade of the century.

My money is on Goldman...oh I mean Paulson


This is a confidence crisis for sure. Liquidity has frozen. Complex mortgage backed securities can fetch only 25 cents on the dollar. So Paulson and Bernanke come up with solution: use taxpayer money to buy these toxic assets from financial institutions. The argument is systematic market failure justifies government action.

Let me ask a question: if these toxic assets are really such a good deal and would likely make money, why would there be no private investors? Is it because of the size? Or is it because these CDOs are too complex that no smart investor can figure out the "hold to maturity" value? Is it complex to a degree that even Warren Buffet would have a preferred stock deal with Goldman instead of buying these good value assets outright?

Let me also point out a fact: Japanese real estate never returns to the level before bubble burst. In fact they fetch less than 50% of that value today, more than 15 years after the crisis started.

What if the market is right, that these mortgage back securities really is worth 25 cents on the dollar only?

"The central bank gets to cheat" - by reflating the housing price? It's really a scary thought.


Gov may do well with Fanny and Freddie - but the shareholders got the shaft. They are at the back of the line now.

Bob Dobb

From Dot coms to penny stocks galore, shareholders get crammed down with losses all the time. And the economy just keeps on producing.

The Paulson plan ain't no bailout, it's an asset swap.

So, yea, call your Congress doofus and complain.... and show you don't really understand it all. Let them vote it all down, and watch the USD lose it's imbedded goodwill.

Mark Sigal

Great analysis, Andy, and I agree with your take fully. Part of the problem here is that if you are staring at an upcoming re-election bid, and being tasked to sell this to your constituency this is a tough sell because:

1) It is too complex for the layman to grok. The interplay between collateralized debt obligations, credit default swaps, massive leverage and the dynamics/dynamite of short selling hedge funds is akin to E=MC2 for most folk (myself included).

2) The message of bailout is incongruent with our pattern recognition about market efficiency and the government having no place to be a player is such an environment. We read about billionaires and their hedge funds, superstar CEOs, etc. and are told that their reward is commensurate with their results (as risk takers), but now in crash times, we are told about the consumer needing to bail out the system. Does not compute.

3) There is such tremendous distrust of Bush administration that has played the ready-fire-aim game more than once that people hear fire, and they tune out.

What is needed, as another commenter suggested, is Paulson as a front man (perhaps surrounded by Buffett and a couple of such luminaries - no one trusts economists), a clearer message that this is not just a bail out but a future nest egg for our economy with an explicit message that government is working on behalf of the consumer, not the financial institutions, and clear articulation of goals and how it will be transparent.

You sell this one once you feel that the House/Senate is lined up (behind closed doors without cameras) so Congress is packaged as having gotten something done, and this is kept as apolitical as possible.



I know some of "those" that are in the middle of the transaction flow at FNM/FRE...there is currently a $300-400 "B"illion hole that has been created there in the last 12 months via leveraging to buy/insure complete CRAP!

Let's get this dance over with and move onto the next stage of grieving...anger.

PS - I've got an IT bottom scheduled for tomorrow +/- 2 trading days (we are in the window).


Did your calculations take into account the debts connected with owning security contracts? You mentioned that "$2 billion in cash up front and some $200 billion in loan guarantees" that the government owns approx. $800 billion in Fannie/Freddie loans and guarantees additional loans. Does not taking over $800 billion in mortgages also mean they took over approx. the same in mortgage security debt? In other words, Fannie and Freddie generated money for their mortgage products by selling mortgage securities which they guarantee will be paid back to security investors. Their profit is made between the difference in interest repaid by mortgage borrowers and the rate paid to security investors. The government take over of Fannie/Freddie does not mean all the Fannie/Freddie security holders lost their investment. That's money the government now ensures will be paid back to those investors.

Tom Smith

We the taxpayers won't have to foot the $700b and the market won't be innudated with these toxic loans. Yea but the Paulson (who worked for one of the best I-banks Goldman) won't get to make the trade of the century.


Paulson and the others in Washington are only making things worse by changing the rules on a daily basis and preventing anyone from being able to make a comfortable investment decision.

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