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Some preliminary notes on Bailout II

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  • Mon, Feb 09, 2009 - 03:04pm

    #1
    RussB

    RussB

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    Some preliminary notes on Bailout II

I just wanted to suggest some notes on this ongoing bailout offensive, now at Part II of how many?

I’m riffing on this overview from today’s NYT: 


http://www.nytimes.com/2009/02/09/business/09bailout.html?_r=1&hp=&pagewanted=print

U.S. Bank Bailout to Rely in Part on Private Money

Administration officials said the plan, to be announced Tuesday, was likely to depend in part on the willingness of private investors other than banks — like hedge funds, private equity funds and perhaps even insurance companies — to buy the contaminating assets that wiped out the capital of many banks.

The officials say they are counting on the profit motive to create a market for those assets. The government would guarantee a floor value, officials say, as a way to overcome investors’ reluctance to buy them.[/quote]

We have these facts:

1. The market has decided that this toilet paper is worth nothing.

2. The government is determined to reinflate this same bubble which just burst.

That’s the situation. So the $x trillion question is, What fraudulent "value" for this paper are they going to try to start with? That’ll be the "price floor" referred to above.

[quote]Besides devising a way to bring private investors into the bank bailout, the Treasury plan is expected to inject more capital into some banks and to give many homeowners relief from immediate foreclosures.

It also is expected to increase financing for a Bush administration program intended to encourage investors to finance such things as student loans and credit card debt.[/quote]

More open-ended capital injections for vague purposes (what, no lies about "getting banks lending again"?); i.e. more direct redistribution of wealth upward.

(Money pit: just last week the GAO reported that $78 billion from Bailout I is already definitively lost, gone forever. That’s only the beginning.)

The student loans and credit card debt are incidental in themselves. The point is to prop up the debt economy in toto.

As for these "private investors", I’m reminded of Back to School : "Where shall we set up our bank rescue plan?" "How about fantasy land!" (More on these private investors below.)

[quote]The stakes for the Obama administration’s bank bailout proposal are high, economists say. Regardless of the specifics of the differing economic plans pending in Congress, no spending stimulus is likely to have much long-term effect unless the bank bailout works.[/quote]

A self-fulfilling prophecy. Once you’ve accepted debt as your religion, and the bank debt-based economy as your church, then indeed the stimulus has to be your collection plate.

[quote]“The simple truth is that a self-sustaining expansion in a capitalist economy absolutely requires a functioning banking system,” said Robert Barbera, the chief economist of ITG, an investment advisory firm. There is a general agreement that previous efforts have yet to succeed.[/quote]

This is stating the obvious and therefore saying nothing. A system that requires that a humongous and globally ramified banking system has to exist in the first place will of course require that this system be "functioning".

But this does not mean that this system has to exist at all, or can exist indefinitely, or that it’s possible to have an infinitely "self-sustaining expansion". In fact, all of these are false, and money spent now to chase this will’o wisp will be spent for nothing. 

[quote]When the Bush administration introduced its original $700 billion bank bailout plan last fall, the government was supposed to be the primary buyer of the damaged assets — the securities tied to subprime mortgages and other dubious loans whose value plunged as the financial crisis intensified. The idea was to pay more than private buyers were willing to spend, but less than the assets might eventually be worth after a recovery.[/quote]

"The idea"? – this means the fraudulent political lie. There’s no way the taxpayers won’t get hosed on this.

[quote]It was also unclear how the assets would be valued, raising political questions about whether the purchase prices would be fair both to the banks and to the taxpayers. But as those assets have remained on the banks’ balance sheets, they have continued to decline in value, producing more multibillion dollar losses.[/quote]

Why is being "fair to the banks" a value? I thought the point was to resuscitate them, fairly or not.

[quote]The securities are complex and hard to evaluate, and there is little public information about precisely which assets are owned by each bank. And some prospective purchasers say banks are not making many available for sale, or have refused to accept the prices being offered.[/quote]

IOW the market finds them simple and easy to evaluate.

Suppressing "public information" – IOW they’re concealing their real state in hopes of getting public money.

"Refused to accept" – IOW they’re banking on the government to use public money to socialize their costs while leaving their profits intact. 

[quote]By trying to bring in private sector buyers to set prices for the distressed assets, and to take some but not all of the risk that the asset value will continue to decline, Obama officials evidently hope to restore confidence in the banking system. They will also try to avoid the politically perilous course of having the government directly buy the assets at prices that could turn out to be far higher, or lower, than their eventual value.[/quote]

The idea is to try to get "private investors" to buy a fig leaf’s worth of this paper (any losses of course insured by the government), to give the admin a modicum of political cover for directly buying the great bulk at far higher than their eventual value.

Here’s the lemon socialist model: 

[quote]A possible model for the way the new Treasury plan could work arose in a deal last July that had no government involvement. In that case, Merrill Lynch sold $31 billion in securities for 22 cents on the dollar. The buyer, the Lone Star group of private equity funds, put down only one-quarter of the purchase price and had the right to walk away, forfeiting only the down payment, if it later turned out the securities were worth even less than it had agreed to pay.

Thus Lone Star stands to receive the upside profit if the securities prove to be more valuable, but has only a limited downside risk if they do not.

In such a deal under the Obama administration’s plan, it would be the government that stood ready to absorb losses if they were too large, while also providing some of the financing for the purchases.[/quote]

And now some promised transparency (which they also, only under duress, promised for Bailout I; we’ve seen how that worked out):

[quote]Any government-assisted deal would probably need much more public disclosure, some economists say, than was made by Merrill and Lone Star, which did not reveal exactly which securities were involved. Presumably, too, the government would want such packages to be shopped widely to get the best price.[/quote]

"Need"…"must"…But probably won’t. Lie to me once…. 

[quote]“They must disclose fully exactly what the government is buying, or insuring, or providing financing for,” said Simon Johnson, a professor at the Massachusetts Institute of Technology and former chief economist of the International Monetary Fund. “Congress is really hypersensitive to this issue right now. Believing you can get away with the opaque deals we saw in Citigroup or Bank of America would be a misconception.”[/quote]

But they’re still getting away with these.

[quote]If investors previously underestimated the risks of such mortgage-backed securities, they now may be overstating their toxicity — at least in the view of some of the banks that hold them.[/quote]

Gee, I wonder why they’d hold that view?

I think this is my favorite part: 

[quote]The banks argue that the few trades of such securities lately have been at unreasonably low prices — ones that would be justified only if foreclosures, and losses on foreclosed mortgages, are far higher than now seem likely.

But the banks have shown little interest in demonstrating their confidence in the securities by buying more of them from one another. Instead, banks have sometimes been unwilling to trust other banks that hold such securities.[/quote]

So: every bank says the same thing. But each bank’s actions show that it thinks all the others are lying. So who do we believe is telling the truth. Any of them?

[quote]That lack of trust, in turn, has spread to the broader international financial system.

If many of those troubled assets can be removed from bank balance sheets, and others seem to have a clear market value, economists hope that banks would feel freer to lend — rather than continuing to hoard capital to protect themselves from further losses. Only then, the experts say, can the banking system get the economy moving again.[/quote]

As Krugman has said several times on his blog, there’s a simple way for banks to get these things off their balance sheets: WRITE THEM OFF. 

  • Tue, Feb 10, 2009 - 05:46am

    #3

    DrKrbyLuv

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    Re: Some preliminary notes on Bailout II

[quote=RussB]But this does not mean that this system has to exist at all,
or can exist indefinitely, or that it’s possible to have an infinitely
"self-sustaining expansion". In fact, all of these are false, and money
spent now to chase this will’o wisp will be spent for nothing.[/quote]

You really struck two different important fundamentals here –

Does it have to exist?

What I think we are seeing is an obviuos attempt to perpetuate and grow a system (more specifically; the benfactors and controllers of the system) rather than promoting prosperity and saving the people.  There is never any discussion for an alternative system – to the contrary; the media won’t even discuss the merits of a private federal reserve bank.  Imagine the outcry if people really understood the federal reserve (and the central banking scam).

In fact, all of these are false, and money
spent now to chase this will’o wisp will be spent for nothing.

Agreed – it would be bad enough if they simply lied about the numbers (US GDP, CPI, M3, unemployment, etc.) but they go a step further in sending us on wild illusions.  My opinion is that they are extending the system and moving as many liabilities as possible from their balance sheet to ours – and they are cherry picking our assets at a nickel on a dollar.

Larry

  • Tue, Feb 10, 2009 - 06:52am

    #2

    Dogs_In_A_Pile

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    Re: Some preliminary notes on Bailout II

Russ –

Thanks for the link – I think.  I made the mistake of reading through the material while trying to listen to the President make his snake oil pitch tonight.

I did find out that the structural integrity of my cardiovascular system is pretty good – I didn’t stroke out or bust an anuerysm.

This one got me going but good:

If investors previously underestimated the risks of such mortgage-backed securities, they now may be overstating their toxicity — at least in the view of some of the banks that hold them.

So now we have both the poison pill and its antidote all at once?

And this one – my favorite:

The securities are complex and hard to evaluate, and there is little public information about precisely which assets are owned by each bank. And some prospective purchasers say banks are not making many available for sale, or have refused to accept the prices being offered.
Whatever happened to last man standing?  Valuation by survival and mere existence – if your bank makes it, there was value.  If it doesn’t there wasn’t.  I agree with your assessments and I find that comments such as these, to the taxpayer and about the taxpayer, to be condescending.  Do these folks think we are all stupid?
Thanks again for the link – I think.
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