Linguistics

The Hedge Fund of America, LP

bartenis - The right would would have been a "few" not a couple. If they collected 3 payments on a 15% loan that is...umm. 3.75% ((15/4 (representing 1/4 of the year or 3 months) =3.75)). So the author wasn't too far off.

How to Spend $700B and Actually Solve the Problem

First lets really talk about what this is not. It is not a BAILOUT. A bailout would be a blank check to the institutions effectively saving them at no cost to the institution (“pay us back when you can”) and the US taxpayer facing a 100% burden. That is not the case here.
What the American media is labeling this reflects their level of understanding. Since when has a journalism degree or a conversation with the Fed Chairman been a proxy for an economics or finance degree. Let’s not forget many of these journalists chose journalism because math and statistics were not their strongest subjects. Rather playing with the written word is, and they have done a fantastic job of misrepresenting what is going on to the American public making them believe we are paying one big bill all at one time; essentially having a huge greenback bonfire of $700,000,000,000.00 which we will never see again. It has been poorly misrepresented and pathetically, even the Wall Street Journal is guilty. If anyone in journalism should know and understand better it is the Wall Street Journal, and they have not properly characterized this.
It will cost the US Treasury about $30,000,000,000 a year in additional interest payments, if all $700,000,000,000 was outstanding at one time. $30 billion is 1/10 of the Defense department’s budget in a given year and there is now ability to profit from those expenditures.
There is tremendous opportunity for upside here. Let’s simplify this to an Ebay model. Those with experience on Ebay understand if you have to sell something quickly because you need the cash, then use the Bid Now feature. You will not get what the article is worth, but you will get what you need much faster. Of course, this depends on your credibility as a seller, judged by your rating. If your rating is poor then the bidders may be skeptical of your desire to sell quickly and of the authenticity of the article. Meaning they may bid less than even the Bid Now feature.
This is exactly where the holders of the Mortgage securities find themselves (Ebay Seller). Other bank and institutions (Ebay bidders) doubt the quality of the asset being sold and do not trust the institutions selling them. So they are not bidding close to what the securities are worth or will not bid at all. Why take the chance?
This leaves only one solution, which is what the Treasury is pursuing. In order to get proper pricing for the assets you need to remove both the timeline (Bid Now issue) and credibility (counterparty risk) issues.
Since the Treasury has the longest timeline and the cheapest borrowing costs of any institution, they can hold the assets until a proper bid is entered (a sale) or to maturity. Thereby minimizing the Bid Now problem other backs have. Further, there is a reason the interest rates on gov’t securities are considered to be the risk-free rate. Having the Treasury hold and sell them puts the future buyers at a better chance to really understand what they are buying. They have time to wait out the irrationality and panic.

In either case the Treasury will receive the interest payments as the Bondholder which should be significantly higher than their cost of borrowing, making a profit on the spread, and in the case of a sale since they have the ability to wait until rational minds reenter the market it should be substantially higher than the discounted value they will be buying them for.
In closing, let’s not forget Henry Paulson is a fmr CEO of Goldman Sachs. He is not a career bureaucrat. If his time at Goldman is a guide, we should expect some of the most capable people available to be executing on the legislation congress just passed. In fact I hope they are willing to pay for the best, because that is what the taxpayer deserves in protecting our position in all of these transactions.
His legacy is riding on this. Hopefully he will be able to separate it from the administration that put him in place.