Maybe the bailout won't be structured as a reverse auction after all. This comes from Ben Bernanke, testifying to Congress today:
"I believe that under the Treasury program, auctions and other mechanisms could be designed that will give the market good information on what the hold-to-maturity price is for a large class of mortgage-related assets. If the Treasury bids for and then buys assets at a price close to the hold to maturity price, there will be substantial benefits," said Bernanke.
Under a reverse auction, Treasury wouldn't bid at all. It would circulate a list of assets, and then buy them from whichever bank was willing to sell them for the lowest price.
The way Bernanke sees the auction working, however, it's the other way around: the banks would tender their assets for sale, and then Treasury would put in a bid at what it considers "close to the hold to maturity price".
As Henry Blodget says,
this is a huge boon to banks and will likely hose taxpayers. Why? Because the government will not have time to figure out what the true "hold to maturity" value of these assets is. Instead, it will have to take the word of banks who have every incentive to dump their crap on taxpayers.
Certainly under this system no outside investor would ever want to get involved. This is a bailout pure and simple, with the government paying too much money for banks' assets. And I don't like it at all.
I do understand that if the government paid a market-clearing price for the assets, the banks would have to take enormous charges against their capital base, and then be recapitalized. Well, so be it -- that's basically what the Dodd plan has in mind.
Transparency is a good thing. If the aim is to use government money to strengthen banks, then do that directly, by injecting it directly into the capital structure. Don't do it indirectly, by overpaying for toxic assets.
This article has 22 comments:
You got a better idea, lets hear it. Seeking Alpha has lots of naysayers with no alternatives. You think we just give up now?
Before you write an article, try and formulate a counter proposal.
It is readily apparent that the plan here is to transfer the very last bits of wealth into the pockets of bankers and drive the US into default. Paulson's pals on the street profit best from a facility that declares a "held to maturity" price and buys assets at those hugely inflated levels, so that is what will be done. The putative Dodd plan is nothing more than a red herring.
Another alternative, posted by another SA contributor (I forgot who), would be to force holders of debt in troubled banks to convert it to equity. That would alter the capital structure of the banks favorably, keave the taxpayers out of the equation (please!), and give everyone a reasonable shot at coming out ahead.
He has misunderstood and underestimated this problem from the beginning. Supposedly he understands the U.S. is a republic -- but he proposes to solve the problem he doesnt understand by naming himself defacto dictator?
Bernanke is being honest -- although probably not on purpose -- that the Treasury plans to overpay for bad assets. Its just common sense that the banks will not be helped if the taxpayers pay a "fair price" for them.
Bernanke is clearly lying when he talks about a "hold to maturity price". There is no such thing. If Bernanke knows in advance which home owners are going to default, he should tell us. If we are going to look at this situation like moderately intelligent people, we have no way of knowing who will/will not default -- so we have no idea whether the hold to maturity price is par or zero. I have to think anyone who gets a PhD in economics knows this very well -- shame on Bernanke for deliberately lying to us.
He has misunderstood and underestimated this problem from the beginning. Supposedly he understands the U.S. is a republic -- but he proposes to solve the problem he doesnt understand by naming himself defacto dictator?"
He understood alright. He just wanted to bailout his pals on Wall Street. He cuts AIG to the bone yet he does not want to be so punitive on GS and MS. Why??
For those here that say there are no "concrete" alternatives, I would say "analyze this:"
Using Case-Schiller data, we can see how much a home is worth in various locales... we can use that calculate how much a 30-year mortgage costs per month for a conforming loan on an average home in that locale. Proposal: the government guarantees mortgage payments for mortgages issued from (reasonable periods, Q2 2005 to Q2 2007?) equal to 80% of that payment size for prime mortgages, 45% for subprime. The resulting setting of a floor price for the mortgage paper immediately sets a bottom value for the papers in question.
This is very expensive, to be sure, but so is the $700 billion being used to currently bail out only the banks with no help to Main Street. Lower income homes are less likely to be foreclosed, keeping the average Joe in their homes, as the return on foreclosure (with certainty in payments from the government versus the uncertainty of home prices today) is lower. Prime mortgages are also less likely to foreclose for the same reason.
It's a truly Keynesian school of thinking, but I'd rather help both Main Street and Wall Street than just the fat bankers.
The major consumer manufacturing that's done in the US is now itself on the verge of collapse, as Americans are finally moving towards higher fuel efficiency vehicles over ridiculous and unnecessarily gas-guzzling behemoths.
I guess it really takes one to know one... Blodget = current scammers. Out of the universe of people to quote, can't you find someone else rather than quoting that bum that lost a lot of people a lot of money?
However I favor the latter because Bernanke want to unfreeze the market and his argument is that once the govt. starts the ball rolling other market participants can start bidding for the securities as well.
For his cash, he received perpetuity preferred shares w/10% dividend, plus $5B more in options priced at 8% below the close.
Can anyone here explain why if a bank like Goldman is stable enough for the world's pickiest investor to put money in today, why we need to give $700 billion of taxpayer money for free, no strings, no dividends, no equity, no options?
If Warren would up his investment to $7B, we'd only need to find 99 more private investors like him and we'd be at $700 billion. Or we can give half of 2007's personal income tax from every taxpayer in america to the banks for free.
Outrageous. This crisis is a sham.
There is only so much that can be added or changed to fix the "system".
The system is fueled by debt. Debt always collapses over time. American consumers can't pay it back, U.S.A. can't produce it back. There is massive depression on the way. Condos in the cities won't be worth shit if there aren't jobs to pay for them. Services won't make a profit if people realize they can't pay for them. The cycle goes on...