Playing Chicken Is a Dangerous Game

Those expressing concern about the correctness or fairness of the prices to be paid are missing the point and might as well just oppose the Treasury and Federal Reserve Proposal. The institutions who will sell are already under-capitalized at current marks. Prices have to approximate the marks to date, whether those marks are too low, about right or too high is beside the point. The mark downs have to end; isn’t that the whole point? Current capital inadequacy is bad enough but it is the fear of more write-downs that has seized the credit markets.

If it turns out the Government paid too much for the securities i.e. the current mark downs are proved with the passage of time, to be insufficient then that is the cost of the bailout. No one knows the true value of these securities which can only be determined with the passage of time.

Minimizing the unknown is above everyone’s pay grade. Talk of taking equity interests makes sense if the Treasury pays par, but that is not going to happen.

Once up and running, the very existence of the program should increase liquidity and prices because there would be a market maker with very deep pockets; nearly $1.5 trillion at 50 cents on the dollar. Credit default swaps would follow suit since their value is based in part on the market value of the underlying object securities. Write downs to date should be more than sufficient to cover actual payment defaults.

We are fortunate to have Paulson and Bernanke. Now we have to be smart enough to take their advice.