Jason Lindt

Do Paulson and Bernanke Really Understand What's Going On?

Thanks for comments everyone.

To User 207572: as I mentioned, Treasury's $700B budget comes nowhere close to covering the universe of assets that are becoming impaired.

To ksh: unfortunately I don't believe the Congress understands this alternative. In a rush created by the administration, Paulson & Bernanke, Congress had little time to listen to any other opinions.

To Asbytec: I hope you're right and it is a liquidity problem. What makes me doubtful is that is how Bernanke has been tackling it so far, exchanging half of Fed's balance sheet for suspect assets, but conditions have kept deteriorating, with lending declining and spreads continuously widening.

To the social scientist. A lot of the paper is theoretically insured both through financial guarantors like Ambac and the CDS markets. However financial guarantors seem to be practically insolvent at this point and the extent of CDS coverage is unclear. We know AIG wrote CDS on ~$450B of senior CDOs straight-up, but most other firms, for example Lehman, would have offsetting CDS exposures, which is why traders from other banks had a frantic Sunday two weeks ago trying to reconcile those offsetting positions. So the notional of CDS market is $62TR, of which Lehman accounted for $2TR, but net is much smaller. AIG did not have offsetting exposures though, so if they defaulted, people who bought insurance from AIG would have to mark those assets to market.

CDS would not apply to the assets that the government purchases, because the selling bank can't just pass the contract along with the asset. However the financial guarantors obligations do apply, so if those guys magically recover, the government losses should be smaller

I did see Krugman's several articles on this and agree with his assessment - hope he can get heard by people on the Hill.

Saving the financial institutions will theoretically help housing indirectly through propping up other lending lines which will not let the economy slide into a very deep recession (as it seems all but certain that were are sliding in one)