Is This a Money Making Bailout? 17 comments
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It seems very ironic to me that while most of the media and politicians keep harping about the size and scope of the bailout proposal, a lot of well respected investment pros continue to harp on how this deal would potentially be profitable to taxpayers. So while certain politicians want to protect the taxpayer, they are actually just pandering to the uninformed or at least that's what their doing according to these people.
Andy Kessler wrote the following article in the WSJ, entitled Mother of all Trades:
My analysis suggests that Treasury Secretary Henry Paulson (a former investment banker, no less, not a trader) may pull off the mother of all trades, which could net a trillion dollars and maybe as much as $2.2 trillion -- yes, with a "t" -- for the United States Treasury.
You can slice the numbers a lot of different ways. My calculations, which assume 50% impairment on subprime loans, suggest it is possible, all in, for this portfolio to generate between $1 trillion and $2.2 trillion -- the greatest trade ever. Every hedge-fund manager will be jealous. Mr. Buffett is buying a small piece of the trade via his Goldman Sachs (GS) investment.
Warren Buffett on CNBC, Explains GS Investment;
If the government makes anything over its cost of borrowing, this deal will come out with a profit. And I would bet it will come out with a profit, actually.
Bill Gross in the Washington Post, How Main Steet Will Profit;
Critics call this a bailout of Wall Street; in fact, it is anything but. I estimate the average price of distressed mortgages that pass from "troubled financial institutions" to the Treasury at auction will be 65 cents on the dollar, representing a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 to 15 percent to the Treasury. Financed at 3 to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 to 8 percent.
The Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street, as lending capacity and confidence is restored to our banks and the delicate balance between production and finance is given a chance to work its magic
So why would taxpayers turn down this trade?
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This article has 17 comments:
September 24 – Bloomberg (Shannon D. Harrington, Caroline Salas and Pierre Paulden): “The $62 trillion market for credit- default swaps, created to protect banks from loan losses, helped fuel a near-meltdown in the financial system and now may be regulated for the first time. "
September 22 – Bloomberg (Bei Hu): “Treasury Secretary Henry Paulson’s $700 billion plan to buy devalued assets from financial companies is ‘a joke’ because it doesn’t go far enough to calm markets, said Kenichi Ohmae, president of Business Breakthrough Inc. Ohmae, nicknamed ‘Mr. Strategy’ during his 23 years as a McKinsey & Co. partner, called for a $5 trillion ‘international facility’' to be made available to financial institutions. The system could be modeled on one used by Sweden during its banking crisis in the early 1990s, he said. ‘This is a liquidity crisis. The liquidity has to be so big that people won’t get panicky.’”
The Fed already pumped an average of 180 billion per day via the discount window during the past week.
The sheep get sheared with smoke in their eyes and you guys are part of the smoke machine.
Do you think this problem came from US government in the first place, making banks give more loans to people who could afford to buy home let alone have the credit score to get it a home. Look , would the government bail me out if I make bad decisions on my finances,I think not. I have lost over 75 % value in my stock portfolio then to top it off I have a AIG 457 fund, whats going to happen to that? I'm sitting in a bad spot right now ... I sure could use a million or two...... LOL
Slap inflation into the picture. We payout in dollars that buy a commodity at a dollar today. The money comes back in inflated dollars. The money has to come back in at a rate that compensates the taxpayer for the inflation. If 700 billion goes out and inflation is 10% annually, and we sit on the assets for 5 years, the tax payer has to recoup 1.75 for every dollar to break even. Don't try to tell me that the taxpayer is going to profit if the estimated return is 7% a year when inflation is 10% or higher... Get real.
Buffet is telling us WE should invest in crappy mortgage bonds -- while Buffet himself invests in preferred stock, whose cashflow comes from taxpayers bailing out the financial markets.
Buffett should take his own medicine or else shut up
You obviously are a socialist. These fat cats made hundreds of millions on the way up and now want to share the losses with all of us. Let them fail. I'm not paying for them to create derivatives and default.
"It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions.”
— Joseph J. Cassano, a former A.I.G. executive, August 2007
This genious is typical of who created the mess. Now we are supposed to bail them out, instead of allowing them to fail.
"In the case of A.I.G., the virus exploded from a freewheeling little 377-person unit in London, and flourished in a climate of opulent pay, lax oversight and blind faith in financial risk models. It nearly decimated one of the world’s most admired companies, a seemingly sturdy insurer with a trillion-dollar balance sheet, 116,000 employees and operations in 130 countries."
These are the arrogant gamblers that you want us to bail out. Well it looks like you get your wish. 634 billion more is on the way thanks to the amoral cowards in Congress.
But the government does not have that money. It has to be borrowed and the national debt expanded. So Treasury will begin issuing huge tranches of debt. Who will buy that debt? Only the Fed will , only the Fed. What will be the impact of all that high powered money on the bond markets and the dollar?
What happens when the money is used to purchase default swap crap at mark to model value and the purchases never turn a profit? Who goes to jail for lying? No one? The arrogance is stunning.
What will you say when the next SecTreas comes around and says he needs 700 billion more? That I can guarantee is going to happen.
The plan bails out any company that dumps their illiquid toxic waste deriviatives on the taxpayer in exchange for dollars. I use AIG as one example. There will be many others. Taxpayers do not profit. The paper dumped on the Treasury has no bid. Nobody assigns it any value. It is arrogant and presumptive to say that this toxic waste will ever have any value.
Taxpayers will get higher inflation, higher taxes, a vastly increased national debt and a prolonged crisis. Those things are certain.
To answer another poster about Buffett not buying, we'll now we see why. GS is planning on buying 50B in distressed mortgage assets. Hum, 10x what Buffett invested in GS.
Try as hard as you can to grasp the scope of that statement taken from the bill.
What are the securities, obligations and "other instruments" based on or related to mortgages? Define the terms MBS, CDO and CDS and relate them to mortgages. The bailout bill gives permission to treasury to buy the credit instruments that were created around mortgages.
Americans understand this and we sent a clear message to our reps to kill the bill.