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Poor Coverage of the Republican Plan

Some say the Treasury will offer artificial high prices and hurt the taxpayer. No, it's the other way around. Treasury does not determine a price somewhere above the non-existent fire sale market prices, the sellers at auction determine the prices and here is how it works:

Treasury announces an auction of say $100B and break it into 4 categories - subprime, option-arm, other prime and home equity. Each category is broken into classes that give granularity to the underlying markets of pools that make up each MBS. Could be many per category, but lets say there are 5 per category for a total of 20 'bidding' traunches.

But it is a reverse auction, so they are 'offer' traunches. Each holder offers a price they will take for $X face value of MBS's to derive a pennies on the dollar price. For each traunch, the Treasury takes the lowest price and works upward until the total dollars allotted to the traunch have been reached. Thus 'we the people' get the best and lowest price and thus the best upside potential as the Treasury can hold the MBS's to maturity.

The prices will be higher than where institutions have been dumping and thus marks to market will be higher. So the holders of all similar MBS's will recover asset value and the credit markets open up.

But here is what will happen after the first auction - hedge funds and vultures will offer to buy the MBS's the Treasury just bought! Why, because the auction established floor prices. Thus the Treasury makes a quick profit and recovers part of its $700B in purchasing power - yes it revolves!

When the next auction is held, there could be lower prices in some traunches [but not likely] as some whose offers were not accepted the first time will make sure they get accepted the second time as they MUST get cash.

The taxpayers will make out like bandits - but the Treasury cannot say this publicly.
[note: JP Morgan gave some insight as to values of the 4 categories each in aggregate as part of their evaluation of WaMu. In a sense, they set a floor price.]

Paulson pulled out the bazooka because of the seizing of commercial paper and not because of GS losing value, that was an effect of the collapsing credit markets. They had the bazooka all the time as simply an outline and had considered many other alternatives including, briefly, the non-workable insurance plan. The plan offered was purposely an outline as only Congress can add the flesh - as they are doing.

There is no need for punitive actions against the institutions holding the MBS's - they are selling at the lowest price - that's punitive enough. Remember, the institutions include pension plans, insurance companies - not just banks! They thought they were buying the best rated traunches and still found out the value has dropped. They acted prudently with the information given to them by the rating agencies. So some would want these institutions that hold the people's retirement and annuity money to give a piece to the Treasury?

This will liquify the banking system, but will not prevent recession.