Saturday, September 27, 2008

Weekend Update - Bailout Myths.

*Poor image quality but a great message.

Well, it looks like there continues to be a strong push to get the bailout package passed before the markets open in Asia (btw - did you notice how the bailout became a "rescue plan" in every news conference on Friday?).

Here's the latest details via Bloomberg

"Under a tentative agreement reached among Democrats and Senate Republicans and the administration, Congress would authorize an immediate expenditure of $250 billion for the Treasury to buy distressed debt securities plus another $100 billion at the government's disposal. Another $350 billion could be spent to buy troubled assets unless Congress specifically acts to bar that authority.

A participant in some negotiations said Treasury is very reluctant to add limits on executive pay and has agreed only when more than 20 percent of total assets were acquired by the government.

Frank yesterday said that Paulson had agreed to equity stakes for taxpayers in the companies through warrants."

The speed with which this deal has been rushed through Congress remains stunning.

Here is what I see as the biggest myths propagated by the Bailout NOW crowd:
1) The bailout will increase lending - While the credit markets have seized up, this bailout plan does nothing to require additional lending. In fact, given the market turmoil, I envision the large banks will sell their bad assets to the government and then sit on the cash. Small business borrowing, consumer borrowing, etc., is dependent on banks having confidence in the quality of the debtors' ability to repay and frankly this bailout does nothing to improve the borrowers ability to repay.

2) The fate of the US financial system is riding on this bill - Innovative financial minds can and will fill the market need for capital if the outdated, highly leveraged, investment banks go the way of Zenith. Someone observed today that bailing out Goldman and Morgan Stanley is akin to saving Univac in 1982 as the PC was about to explode. It is wasteful to pour more money into this failing pool of banks and if you want to transfer assets to the consumer the less middlemen, the better. Spreading liquidity and risk across a new financial network is necessary to revitalize the market.

3) The markets need this by Sunday - yes, markets will initially cheer this news, because the psychology of the market needs an little boost right now. However, I can't emphasize enough how bad the economic data coming out is right now. We're entering earnings season, GDP data will be released next week and unemployment data in 10 days - all of these data points could be stunning.


A wonderful summary of the week's events at MSN Money with editorial content - Trust Them? We Don't Have a Choice.

My favorite quote:
"American and foreign fund managers alike are already upset at being suckered into buying overrated U.S. mortgage derivatives from companies like the one Paulson used to run, Goldman Sachs.

But now the TV appearances are making the public realize that the folks in charge of these debacles aren't even very clever. This is aggravating because it's one thing to lose billions in an ingenious con, but to realize you were taken by fools just makes you furious.

In his close-up this week, Paulson appeared uncomfortable, unknowledgeable, uncaring and often unintelligible, as if notes he had scrawled on a cocktail napkin on the way in were just out of reach. Bernanke was more patient with senators' dumb questions and self-serving speeches, yet he clearly gave the impression of an egghead who would rather be teaching Econ 363 back at Princeton."

"Think of this $700 billion gambit as just one more levered-up deal from Paulson, whose old company was the master of borrowing. In the private sector over the past decade, the answer to problems with leverage was to add more leverage, created more opaquely. But now it's not Goldman partners that are on the hook; it's my mom and sister, my kids and probably my future grandkids' grandkids. I know we're supposed to think the plan will work because those guys in the hot seat are smart, but the evidence that Paulson and Bernanke really know what they're doing is thin at best."

Finally, this is for anyone in the 30 to 45 yr age group. Secretary Paulson = Skeletor from Heman.

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