US Treasury bailout $700 billion

A lot of people have asked me what I thought about the bailout and I have responded that I am not smart enough to know if it is the correct action to take or not.
Way too complex a scenario for ne to decipher. Lets hope it all washes out soon.

jhuskey said:

A lot of people have asked me what I thought about the bailout and I have responded that I am not smart enough to know if it is the correct action to take or not.
Way too complex a scenario for ne to decipher. Lets hope it all washes out soon.

It's a difficult one to call.

The bailout is bailing out the banks only.
The bailout isn't bailing out the US taxpayer.
Nor is the bailout going to help those Americans who are having difficulty repaying their mortgages.

This is the nub of the problem, as I see it.

But was there any viable alternative to the $700 bn bailout?
Could the US economy run the risk of having more banks go to wall?

Hobsons choice in my view.

limerickman said:

It's a difficult one to call.

The bailout is bailing out the banks only.
The bailout isn't bailing out the US taxpayer.
Nor is the bailout going to help those Americans who are having difficulty repaying their mortgages.

This is the nub of the problem, as I see it.

Some lenders have now announced that they will adjust mortgage rates to allow some relief.
You are correct in the assumption that it won't help me or others that will help pay for this.

jhuskey said:

Some lenders have now announced that they will adjust mortgage rates to allow some relief.
You are correct in the assumption that it won't help me or others that will help pay for this.

I don't see that adjusting rates in bubble markets will do much good. People making $80K bought $750K houses. No adjustment in interest rates will help. The mortgage would need to be cut down to $250K, but that would mean the mortgage holder takes a $500K loss.

Maybe in cases where people can really afford their houses but they were given ARMs when they should have been given fixed rates, adjustment will help. But in many cases ARMs with teaser rates were being given out so people could buy a lot more than they could afford. Adjustment will lead to huge losses across the industry. It is likely that currently a large number of banks are insolvent--even without any adjustments.

This whole thing is a giant clusterfuck. It looks like everything is overvalued, starting with the houses and extending to the creative finance products that were made out of the mortgages. It is a giant inverted pyramid that has its apex balanced on housing prices, which are now crumbling. I cannot help but think that trillions of dollars of phantom value have been created, and there is no solution other than trying to control the collapse so it does as little collateral damage as possible.

I have nihilistic thoughts that a lot of derivatives should be declared null and void. Tens of trillions of value would go up in smoke, but that value is not real anyway. It should be recognized as bogus. Credit default swaps essentially amount to selling insurance without a license and without the usual regulations that ensure the policy writer will be able to pay the claims. Void everything and let the chips fall where they may.

Bro Deal said:

I don't see that adjusting rates in bubble markets will do much good. People making $80K bought $750K houses. No adjustment in interest rates will help. The mortgage would need to be cut down to $250K, but that would mean the mortgage holder takes a $500K loss.

Maybe in cases where people can really afford their houses but they were given ARMs when they should have been given fixed rates, adjustment will help. But in many cases ARMs with teaser rates were being given out so people could buy a lot more than they could afford. Adjustment will lead to huge losses across the industry. It is likely that currently a large number of banks are insolvent--even without any adjustments.

This whole thing is a giant clusterfuck. It looks like everything is overvalued, starting with the houses and extending to the creative finance products that were made out of the mortgages. It is a giant inverted pyramid that has its apex balanced on housing prices, which are now crumbling. I cannot help but think that trillions of dollars of phantom value have been created, and there is no solution other than trying to control the collapse so it does as little collateral damage as possible.

I have nihilistic thoughts that a lot of derivatives should be declared null and void. Tens of trillions of value would go up in smoke, but that value is not real anyway. It should be recognized as bogus. Credit default swaps essentially amount to selling insurance without a license and without the usual regulations that ensure the policy writer will be able to pay the claims. Void everything and let the chips fall where they may.

Good points.

There is a huge difference between a bank being insolvent and a bank being illiquid.

An illiquid bank can be solvent and can still trade it's way out of the mire.

The problem as I see it is that even with the bailout, there is still a very serious underlying issue of mortgages being defaulted upon.
With a recession taking hold, it is likely that more defaults will take place, which means that banks have to provide for more bad debt, which means that other banks will not lend to those same banks because no one can accurately access the actual level of good/bad debt sitting on a banks balance sheet.

The stock market is still taking a beating today. It will eventaully adjust ,but when?

jhuskey said:

The stock market is still taking a beating today. It will eventaully adjust ,but when?

6000

Looks like that 700bn is running low and the job is nowhere near done. Oh yeah, NO Controls were put in plsce either. Great job, Paulsen. What's gonna happen when he wants another 700bn? Reality; Bush is just paying off his friends with your money. bk

limerickman said:

Just watching the reaction to the US Treasury $700bn bail out plan.

The markets, particularly bank/financial share prices, continue to head south across all of the major exchanges.

It would seem that the bailout hasn't help to restore confidence in the value of banking/financial shares.
Nor has the bailout managed to defrost the frozen interbank lending market.

I believe what you are now seeing, since the bailout announcements, is not a devaluing of stocks because of widespread panic anymore, but mainly a function of widespread market "de-levering." With leverages as high as 12:1, raising liquidity and meeting margins during the subsequent free-fall have forced even more selling. (Okay, there's still some short-term panic in meeting the margins and for individual institutions and investors for example) After greater liquidity is restored to the survivors, all that "parked" money is going to have to go "somewhere" and a seriously devalued market will be very attractive. Liquidity builds confidence and I expect a long steady Bull market beginning in mid 2009 with much slower growth as a result of either market stabilized or legislatively controlled lower leveraged positions. Bet on legislation, IMO.

Is that good? Probably not for huge increases in jobs or private high expenditure/low yield projects like research into alternative fuels etc... unless they too are government funded and guaranteed. GM (if it's around?) may not to be able to keep playing with electric cars for example, even though that should be their future.

Everyone's going to have to raise taxes on "Joe" IMO to cover the costs of these "bailouts" and the bureaucratic oversight agencies created, fund research (if we're serious about solving "big" problems like climate change and alternative energy) and create Public works jobs programs. (Watch, they'll spend billions rebuilding the current transportation infrastructure rather than create new mass transit alternatives.) It will be hard to balance the restrictions of the current "big regulatory agencies" with needed independent innovation in the future, especially with respect to the environment and health care, IMO.

"Buy" soon!

Looks like the banks aren't interested in using their bailout money for new lending. Instead, thay are treating it as infusions of new capital, to be used for their own purposes. I suppose when the preferred shares come due for buyback, the banks will let them be converted to common stock.

This clown Paulsen sure is blowing it out his a**. What's he going to do when he comes back for more bailout money and congress says no? bk

And "printing" 700 billion USD for the banks will not cause any further inflation?! Look at Zimbabwe 😄

Will USA start competing with them over having the world's highest inflation rate? :p

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