What will happen if....?

Originally posted by whodey
As I watched Uncle Ben give his testimony before Congress, I got the impression that if the money is not infused into the economy QUICKLY that all hell will break lose and there will be no going back. Then they can work out the details later. I could be wrong, but that was in impression I was left with and I could tell the Congressional members were not hav ...[text shortened]... t the time, therefore, I doubt they will pass it according to Uncle Ben's time frame if at all.

Some part of it, sure. But I don't see how they can spend 700 billion QUICKLY and effectively. Only if they are out to buy indiscriminately. I don't see how that helps.

Originally posted by Palynka
Some part of it, sure. But I don't see how they can spend 700 billion QUICKLY and effectively. Only if they are out to buy indiscriminately. I don't see how that helps.

Put simply, it would provide liquidity for the market to continue to function and $700 billion was the price tag for doing so.

Originally posted by whodey
Put simply, it would provide liquidity for the market to continue to function and $700 billion was the price tag for doing so.

But what type of liquidity? You see, this doesn't make much sense to me.

If the problem was the institutions not having liquidity, then surely some sort of preferential loans would be a better option. Even if we say 0% interest for a few years.
If the problem is that these assets tehmselves are not liquid, then how is taking them off private hands provide that liquidity? As far as I heard it, they are planning on keeping them until a later date. That's as illiquid as it can get.

Then surely this is not actually about liquidity, but solvency. If solvency is to be addressed by buying junk off the financial players balance sheets, then you're basically just giving them 700 billion as a gift. Worse. Those with the most junk would receive the most money.

Something is missing here and I was hoping for them to clear it up. All I heard where descriptions of how bad things are and not enough about what EXACTLY is the plan.

Originally posted by whodey
Put simply, it would provide liquidity for the market to continue to function and $700 billion was the price tag for doing so.

You're being ridiculous and Uncle Ben is being deceitful. Even the US government doesn't have $700 billion sitting around somewhere. There's no fricking way anything but a tiny portion of that will be paid anytime soon. In addition, there is the very big problem of actually putting a value on mortgage based securities that are pretty much completely illiquid now. If they pay book value, the taxpayers are being robbed. If they pay only a portion of book value, these firms are going to have to show huge balance sheet losses which will severely limit their ability to lend anything.

Your attempt to blame policies from decades past is laughable. It was only recently that firms started creating these mortgage based securities and it was even more recently that they starting issuing them in vast quantities. Nothing that Carter (are you joking??) did 30 years ago is remotely related to the present "crisis". As for Clinton, he signed a bill that every Democrat in the Senate voted against the first time around, but still with proper regulatory oversight this result wouldn't have happened. After 8 years of sleeping on the job, Treasury now wants virtually unlimited power to spend vast amounts of taxpayer money to bail out incompetent corporate execs. Screw that. Bush's whole economic policy gurus should be resigning, not insisting they be given immediate power to run up the deficit to over a trillion dollars a year.

Originally posted by Palynka
But what type of liquidity? You see, this doesn't make much sense to me.

If the problem was the institutions not having liquidity, then surely some sort of preferential loans would be a better option. Even if we say 0% interest for a few years.
If the problem is that these assets tehmselves are not liquid, then how is taking them off private hands prov ...[text shortened]... heard where descriptions of how bad things are and not enough about what EXACTLY is the plan.

I quoted this article from a few days ago in another thread but apparently it's too difficult for whodey to grasp:

THE BIG MEGILLAH For the last few weeks, a growing chorus of voices has called for the establishment of a new Resolution Trust Corporation, the entity the government devised in the wake of the savings and loan crisis to take over, and eventually sell off, the assets of failed S.& L.’s. On Wednesday, that chorus got its most powerful voice, when Paul Volcker, a former Federal Reserve chairman, co-authored an op-ed article in The Wall Street Journal.

That crisis, however, was very different from this one. Most of the assets in the S.& L. crisis were real estate — which are always going to have value. And the government didn’t have to acquire them; it simply took them over and, over time, sold them. This time, the assets are complex derivatives of uncertain value that the big firms will actually be selling to the government.

But how is the government going to assess these securities — and what price will it pay for them? In many cases, these securities aren’t being sold because they are still overvalued on a firms’ books. That is, their mark-to-market price is unrealistically high. Will the government buy it at the too-high price? If it does, the firms won’t have to take additional write-downs — but it will constitute a huge, unjustified bailout of Wall Street. (More moral hazard.)

But what if the government drives a hard bargain, and gets the securities for what they are really worth — 20 cents on the dollar, say, instead of 50 cents? In that case, the firms would have to take yet more enormous write-offs, which would further damage their balance sheets, and they would have to raise billions more in capital. Maybe the removal of these bad assets would allow the firms to raise the capital. But maybe not — meaning one or more could conceivably have to file for bankruptcy, creating yet another spasm of financial turmoil. It’s a huge roll of the dice by the government.

Finally, there is the question of how much it will ultimately cost. “Institutions so far have written down $550 billion globally of bad debt,” said Daniel Alpert, managing director of Westwood Capital. “We think that when you add up all the problems in the residential housing market still to come — further erosion of housing prices, mortgage foreclosures and so on — we are going to need another $1 trillion of write-downs.”

In other words, for all the toxic securities that Wall Street has acknowledged holding, there will be yet more mortgage-backed paper that will go bad as the housing market continues to fall. As much as we all hope the worst is over, it’s probably not.

http://www.nytimes.com/2008/09/20/business/20nocera.html?8dpc=&_r=1&adxnnl=1&oref=slogin&adxnnlx=1221923684-QGrLyjWW8z7VqURNidKweQ

Originally posted by Mad Rook
Here's a CNBC Squawk Box interview with Warren Buffett about the credit crisis and his investment in Goldman Sachs. Warren thinks that the bailout is absolutely necessary, and he thinks that the U.S. government can actually make money on the bailout if they approach it in an intelligent manner. (Yeah, I know, government and intelligence in the same sentence?)

http://www.cnbc.com/id/26867866/site/14081545/

Buffett is suggesting that the government buy the mortgage backed securities at 15-20% of their balance sheet value. But he doesn't address the point raised in the article I cited above:

But what if the government drives a hard bargain, and gets the securities for what they are really worth — 20 cents on the dollar, say, instead of 50 cents? In that case, the firms would have to take yet more enormous write-offs, which would further damage their balance sheets, and they would have to raise billions more in capital. Maybe the removal of these bad assets would allow the firms to raise the capital. But maybe not — meaning one or more could conceivably have to file for bankruptcy, creating yet another spasm of financial turmoil. It’s a huge roll of the dice by the government.