Bailout Should Be A Windfall For Taxpayers - Barron's 16 comments
-
Font Size:
-
Print
- TweetThis
Taxpayers should withhold judgment on the Treasury’s $700 billion bailout because they’re likely to profit from it, according to Barron’s. Just do the math: Fear is dictating market loss projections of $1 trillion. But senior tranches of mortgage-backed securities [MBS] are good quality and unlikely to fail: Only $200B worth is actual subprime junk. Losses will likely be closer to $250B.
The Treasury can only buy $800B of the $1T MBS because hedge funds and foreigners own the rest. So assuming the Treasury buys MBS for about $0.65 on the dollar, the ultimate payout shouldn’t surpass $520B. Investors recently bought MBS for between $0.22-$0.50 on the dollar. They’re forecasting 14%-and-higher profits, even with massive defaults. Treasury’s low-cost debt should render yield spreads at about 7%-8%. PIMCO’s Bill Gross sees a $75B premium in just two years. Stabilization should restart the mortgage and housing markets, allowing the government to sell securities later on at a profit. They may not even have to use all of the bailout money once trading resumes.
The Resolution Trust Corp., which divested S&L assets in the 1980s, saved taxpayers $225B from an originally-estimated $350B bill. This time around execution will be more efficient, easier and cheaper. An un-levered Treasury has the luxury to wait. Taxpayers should too.
As hedge funds own such a big chunk of MBS, it’s no surprise when Seeking Alpha’s Market Folly lists some of the hedge funds, big and small, that are struggling to survive against massive losses and redemptions. Only the most capitalized will survive this storm.
Interestingly, Steve Hansen shows who is for and against the bailout, and why. Some examples: The Manufacturers Association, Chamber of Commerce and entities like the American Boiler Manufacturers Association (Nat’l Ass’n of Homebuilders and Nat’l Ass’n of Realtors are no-brainers) are all for the bailout, citing fears of a credit freeze up that will devastate manufacturing. The National Taxpayers Union, the AFL-CIO and teamsters as well as the ultra-conservative John Birch society, are all against. The unions say workers will pick up the tab and they'll lose their homes.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
TraderMark
-
2
Don Dion
-
3
Cliff Wachtel
-
4
Mike Havrilla
-
5
James Quinn
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 16 comments:
The problem is not the leverage of 40-1, it is the problem of 40-0 that the US is dealing with...there are no homeowners for a great many of the mortgages given to people. What is wrong with you people?
How are we going to restart the housing market with tighter lending standards? With proper lending standards, the pool of potential buyers is much smaller than it was 2 years ago - how many buyers can put down 10-20% of the purchase price on a home? With significantly fewer qualified buyers, lots of unsold homes, and continued economic challenges, this would seem to point to a continued decline in home prices and more defaulted loans. I've got a novel idea, lets jumpstart the housing market by letting banks give out home loans to anybody! No money down!
Fall = Descend from a higher position
I agree with the author who may not be a proxy from the Barron's I used to know. The taxpayers will be brought to their knees, if not placed flat on their back, from all of the hot air coming out of Washington.
The RTC lost $124B based on a white paper recently published by FDIC analysts. The fact that the loss was not $350B is not comforting. In the RTC case the government owned the underlying assets. Simple math. A+B=C
Do the math. This is equivalent to asking someone incapable of balancing a checkbook to understand "partial differential equations". Check wikipedia. There are too many variables in this calculation period. More disconcerting is the assumptions of this complex mathematical formula are being provided by legislators (Politicians). It is no wonder Ben Bernanke does not want to play in this game. He has his hands full already and is prone to fumble if he has to carry the ball on every play.
It's not even "fuzzy" math or "Bushy" math. It's "wiki-wiki" math.
Until housing affordability comes in line with the real number for most Americans, the underlying mortgage cesspools will continue to stink.
Now we have a sea of debt instruments of uncertain value that are an accounting nightmare, bringing major institutions to their knees. It makes sense to me to create a market for the questionable debt BUT
1. it is not a panacea
2. the current administration is incompetent at best and corrupt to the core at worst
I would prefer to change the accounting rules for the duration of the crisis (i.e. suspend mark to market for illiquid assets, suspend short selling -- isn't that why God gave us put options anyway?), and reinject capital where needed on Buffet-like terms.
The fact of the matter is that Warren Buffett (like him or not --- and I think he's a good guy fwiw) will be the single biggest individual beneficiary of the bailout. So of course he likes it! He literally has billons of dollars at stake in this matter.
Warren Buffett might be smarter than me, but he's smarter than all the writers that keep citing him, too, because he's able to convince them that the entire world will end if they don't support a bailout that benefits him immensely.
The biggest misnomer here continues to be that falling home prices are the problem. As was pointed out already by a previous poster, that's simply not the case. The problem was that rapidly rising home prices in the early part of this decade that created a bubble that was bound to burst. This resulted from issues in the financial system. You can not remedy the problem by simply re-inflating the bubble which is what the bailout is designed to do.
There is no way that the Treasury will be able to manage the bailout profitably - they will need to buy the junk above its book value or they will not help the balance sheets of hte lenders; they will need to drive down its value by forgiving borrowers; they will be measured on speed of absorbing the toxic stuff rather than how much they pay for it; etc.
It may be the only thing that can be done at this late hour, but there is no way that it will pay off - and it is disappointing that Barron's would push the salesman's argument that it will.
IF the govt lowballs the banks for the mortgage pools, then hedge funds and vultures will come in and buy the mortgages and the market will open up again. The sooner the govt starts the ball rolling, the sooner the mortgage market will be able to stand on it's own again. As of now, NO ONE wants to even offer to buy these pools until the govt passes the bill since there is so much uncertainty around.
I don't need to know partial differential equations to know that if I buy assets worth .75 for .50 then it's worth buying. The key is to pay the right amount for the assets and the profits will come, leading to market players returning to the market.
Learn the details ripping the govt, Rep. or Dems. No plan is perfect but this one is good. The misinformation out there is horrible though. Study up.
TIRED OF THIS, THEN READ ABOUT SENATOR FEINSTEIN OF CALIFORNIA WANTING ADDITIONAL CONTROLS OF LOAN agents and mortgage companies.
This would require federal licensing to engage in the sale of these contracts. BUT...this is not enough...
I am monitored by CAMERA AND RECORDED in my office. Enough said...if you signed a LOAN DOCUMENT AND WERE RECORDED and FILMED when signing the documents THE EVIDENCE would be filmed and retrieveable when sent to a branch of the BANK REGULATORS OR nightly sent to a secure document warehouse.
LETS REGULATE GREED AT THE SOURCE....FILM IT...RECORD IT..EVEN DOCUMENT ORIGINATIONS AND SIGNINGS LIKE THE CDO'S WOULD CREATE A PAPER/FILM TRAIL FOR LATER PROSECUTION IF NEEDED.
REGARDS
DIEGOjames