How A Bailout Plan Could Work

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Submitted by ltokuda on September 27, 2008 - 10:27pm

I talked to my brother about this subject. He works for a company which has some ties to wall street so he gets to talk to some knowledgeable money managers. Here's part of the problem with the MBS market:

Suppose company A wants to sell a pool of MBS's to company B. Suppose A and B analyze the pool and both come to the conclusion that the pool is worth 80 cents on the dollar. Then suppose company A offers to sell the pool to company B for 70 cents on the dollar. Would company B take the offer?

The probable answer is NO. The reason is that MBS's are bad for publicity. If company B announced that they were buying MBS's, there's a good chance that investors will lose confidence in them and the market might punish their stock. So even though company B might see a good deal on the table, they probably won't take it. The negative publicity penalty is too high.

Another issue with MBS's is that the money managers have a herd mentality. When everyone was buying MBS's, it didn't really matter if you lost money on them. Since everyone made the same mistake, you didn't look *too* bad. But since no one is buying MBS's right now, if you buy some and lose money on them, you'll probably be fired. Money managers aren't inclined to take that kind of risk.

A bailout plan might work if the government can take advantage of the fear in the market and purchase MBS's at below their theoretical values. In the above example, if the government were offered the MBS pool at 70 cents on the dollar, the government should say YES. That way, the public can probably earn a profit in the long run.

I'm still not sure how a bailout plan will stimulate others to enter the MBS's market. I have one guess, though. I think there are entities out there (like sovereign wealth funds) that are waiting on the sidelines to buy at rock bottom prices. They won't accept a 70 cents on the dollar offer now if they think they can get 20 cents on the dollar next month. So if the fed starts buying MBS's, it puts a floor on how much of a discount you can get. Once the floor is in sight, these entities might start to jump in.

The Paulson plan doesn't seem to be designed to benefit the tax payer. It looks like Paulson plans to purchase MBS's at ABOVE their theoretical values. That doesn't make any sense. How can you attract other bidders to the market if you're going to enforce artificially high prices? So even though a bailout plan COULD work, it doesn't look like the Paulson plan will.

‹ Here's a Bail Out Plan for yah.... It aint over until the fat lady sings...sort of... ›
Listen to the Roubini
Submitted by stockstradr on September 27, 2008 - 10:44pm.

Listen to the Roubini teleconference (linked from another current thread on this forum), where an objective smart economist shares how he thinks the plan should be reformulated to include.

As originally concocted by Paulson, anyone with a functioning brain could see the plan is a confidence game, also known as a bunko, con, flim flam, gaffle, grift, scam, scheme, or swindle!

It's obvious goal was to use fear to swindle money from good American taxpayers and use that money to prevent RICH shareholders of (such as Paulson) from losing money on their stock shares in Wall St. financial firms

Reason why confidence scam artist (also Treasury Secretary) GOT ON HIS KNEES to beg the Speaker of the House is because Paulson wants to save (w/taxpayer money) his own hundreds of millions of stock and options in Goldman Sachs (for which he was previously CEO!)

Wake up America to this scam.

Quote: The Paulson plan
Submitted by KIBU on September 27, 2008 - 11:30pm.

Quote:
The Paulson plan doesn't seem to be designed to benefit the tax payer. It looks like Paulson plans to purchase MBS's at ABOVE their theoretical values. That doesn't make any sense. How can you attract other bidders to the market if you're going to enforce artificially high prices? So even though a bailout plan COULD work, it doesn't look like the Paulson plan will.

I think Paulson wants to balance between moving the toxic MBS out of portfolios of these companies to clear the clog for the short term while not overpay too much for these MBS so that tax payer still have a chance of breaking even for the long term.

But the goal won't principally be for tax payer's recoup of money, rather in the short term to overpay these MBS enough in order to support the survival of problem wallstreet firms.

KIBU, I understand how the
Submitted by ltokuda on September 27, 2008 - 11:46pm.

KIBU, I understand how the fed can move MBS's off a companies balance sheet. But in Paulson's testimony, he said that the fed's purchases of MBS's would "prime the pump" for the market and attract other investors. That doesn't seem possible if the fed is paying artificially high prices.

stockstradr, I'll check out the video as you suggested. I'm a regular reader of Roubini's blog but it will be interesting to get views from other economists as well.

ltokuda, http://piggington.co
Submitted by stockstradr on September 27, 2008 - 11:51pm.

ltokuda,

http://piggington.com/roubini_on_the_cur...

That thread explains how to get access to that MP3 audio file of the teleconference.

Personally, I like the bail out proposal that Roubini explains as one of many topics in that teleconference

Itokuda, I think they are
Submitted by KIBU on September 28, 2008 - 12:48am.

Itokuda,

I think they are having multiple goals and objectives which may conflict each other and they will have to walk the rope carefully.

Paulson is asking for the broadest tools possible. Multiple tools means definitely that the "bidding" process as you mentioned won't be the only tool where the treasury will buy these toxic MBS. Bidding will be there to find the lower price in certain situations to "prime the pump". But other direct tools could be applied to save the pump at the same time (ie buying at over the price).

Paulson's submitted plan on paper mentioned nothing of "bidding" even as he testified. Rather, it requested for the broadest range of means to buy up toxic waste with 700 billions:

http://paul.kedrosky.com/archives/2008/0...

As I read Paulson's original
Submitted by TheBreeze on September 28, 2008 - 10:41am.

As I read Paulson's original proposal, his plan was to take $700 billion in taxpayer money and incinerate it. Under the current bailout plan, it looks like Paulson will be incinerating less money and at a slower rate. That's a win for the taxpayer I guess.

Paulson is worth Half a
Submitted by dd123 on September 28, 2008 - 1:42pm.

Paulson is worth Half a billion dollar today because of his stock options
He would do anything to save his big $$
Fcuk the taxpayers/who cares