Sunday, September 21, 2008

Thoughts on the Mother of All Bailouts

I just realized that no one is talking about a critical issue regarding this rescue package. There is a possibility the program will not work. Here's why:

The banks are allowed to, right now, swap the same bad assets that the Fed would be buying in the bailout, for cash from the Federal Reserve. So why aren't they doing it and unloading this shit off their books?

Well, the reason is because no one wants to reveal the actual "market" price of the bad bonds(CDOs, subprime securitized bonds, other securitized assets). Because as of now, the valuations of these bonds are insanley high - citigroup has valued them at 61 cents on the dollar, but Lehman valued theirs at 39 cents on the dollar, even though everyone is holding similar packaged bonds. The fact of the matter is that the banks don't want to swap the stuff to the Fed for cash because then they would have to reveal the reality - the bonds are worth next to nothing - and if they had to face up to reality, then every banking institution would be bankrupt.

So now Paulson is establishing this fund that is supposed to buy them up. At what prices? If the price is too high, like the absurd 61 cent valuation by Citigroup, then there wont be enough of the 700 billion to go around because there is a lot of this stuff out there - citigroup has over 1 trillion in off balance sheet shit, Wachovia alone has 122 billion in problem securitized shit.

So, while the bailout will obviously help, it may not be the cure and there may be much more turmoil to face. It all depends on the price the Treasury is willing to buy them at - and if the price is too high then there wont be enough of the money to go around for it to be a cure persay, but will definitely help, especailly if they are willing to pay ridiculously high prices.

And I hope they aren't, cause that would just be a total screwing of our money and our government for these corporations. In short, and I am surprised to say this, I do not think the plan is big enough to cure the problem and quell the issues of solvency for many of the bigger banks.


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