Sunday, October 05, 2008

Is Anyone Else Tired of Bailout Talk?

Me, too. But, alas there isn't much else to talk about outside of the dominance of the NFC East.

1) Friday's market failure - there was substantial chatter on the Wall Street that the bailout would be followed quickly by an inter-meeting rate cut by the Federal Reserve. When that didn't occur market took a dive. However, I would not be surprised to see a coordinated global rate cut some time this week.

"Business leaders, economists and politicians called on the Bank of England to announce a sharp cut in interest rates this week. A reduction in the base rate of up to 0.5 percentage points is now predicted." - From the telegraph.co.uk


2) Will the Bailout Work? - As I've said many times, the bailout is flawed in its assumptions and it's goals. It seeks to address the problem of too much credit and easy money lending standards by pumping more money into the system. Congress was apparently sold this story with two consistent bullet points - without this package the stock market will fall 30% and taxpayers are protected through warrants. What will be the reaction in Congress be in about a month if stocks are down 20% from here and the only banks participating in the bailout are the absolute bottom of the barrel?

"What the government now proposes to do is to buy the questionable assets to protect the institutions against failure. So far, so good. Yet just taking the assets out of the mix would do nothing to provide additional bank capital, so the balance sheets would be just as fragile and prone to bankruptcy. At best, Hussman adds, you'd be allowing banks to liquidate their bad loans more easily to meet the demands of customer withdrawals.

The only way buying the bad assets could increase capital would be if the Treasury overpaid for them. And that would be so politically unpalatable that it isn't worth even contemplating."


There was a great summary of the state of uncertainty surrounding the bailout at The Big Money -

1) When is this going to happen? Nobody knows for sure.


2) Who is going to run this thing? Nobody knows for sure.

3) What kind of assets are we going to buy? Nobody knows for sure.


4) How much are we going to pay? Nobody knows for sure.

5) Where will all of the bailed out banks be headquartered? Nobody knows for sure.


Hmm, doesn't that inspire confidence? The biggest problems that I see are numbers 3 and 4. The banks know that the Government has a huge pool of money to invest and if you were in the bank's shoes would you offer up your best assets or your weakest assets (or more likely, the most stubborn banks will fight the urge to participate due to the substantial government oversight - this will stretch out the debacle for years and years)? If I put out a bid to buy any house in the North Country for 25% of appraised value for cash what kind of takers would I get? Of course, the only takers would be the worst properties in the worst neighborhoods. That's what we the taxpayers are likely to get from the banks - the worst debt in the worst neighborhood.



Cheers!

On a Lighter Note - Researcher have finally found the end of the rainbow. I think we may all need to visit the end of the rainbow in a couple of months.




















Sorry, if the image is a little blurry - the store in the photo is "The Beer Store" an Upstate NY chain of beer barns.

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