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eazyb81
09-24-2008, 12:19 PM
Hopefully this will help explain to users on here how exactly the $700B proposal can work out in favor of the taxpayers.

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How Main Street Will Profit


By William H. Gross
Wednesday, September 24, 2008; A23


Capitalism is a delicate balance between production and finance. Today, our seemingly guaranteed living standard is threatened, much like it has been in previous recessions or, some would say, the Depression. Finance has run amok because of oversecuritization, poor regulation and the excessively exuberant spirits of investors; the delicate balance has once again been disrupted; production, and with it jobs and our national standard of living, is declining.

If this were a textbook recession, policy prescriptions would recommend two aspirin and bed rest -- a healthy dose of interest rate cuts and a fiscal package that mildly expanded the deficit. That, of course, has been the attempted remedy over the past 12 months. But recent events have made it apparent that this downturn differs from recessions past. Today's housing bubble, unlike that of the stock market's before it, was financed with excessive and poorly regulated mortgage debt, and as housing prices began to tumble from the peak, the delinquencies and foreclosures have led to a downward spiral of debt liquidation that in turn led to even lower prices and more foreclosures.

And so, instead of mild medication and rest, it became apparent that quadruple bypass surgery is necessary. The extreme measures are extended government guarantees and the formation of an RTC-like holding company housed within the Treasury. Critics call this a bailout of Wall Street (http://www.washingtonpost.com/ac2/related/topic/Wall+Street?tid=informline); in fact, it is anything but. I estimate the average price of distressed mortgages that pass from "troubled financial institutions" to the Treasury at auction will be 65 cents on the dollar, representing a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 to 15 percent to the Treasury. Financed at 3 to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 to 8 percent. Calls for appropriate oversight of this auction process are more than justified. There are disinterested firms, some not even based on Wall Street, with the expertise to evaluate these complicated pools of mortgages and other assets to assure taxpayers that their money is being wisely invested. My estimate of double-digit returns assumes lengthy ownership of the assets and is in turn dependent on the level of home foreclosures, but this program is, in fact, directed to prevent just that.

In effect, the Treasury will have the fate of the American taxpayer in its hands. The Resolution Trust Corp. (http://www.washingtonpost.com/ac2/related/topic/Resolution+Trust+Corporation?tid=informline), created in the late 1980s to deal with the savings and loan crisis, dealt with previously purchased real estate, which was flushed into government hands with a "best efforts" future liquidation. Today, the purchase of junk mortgages, securitized credit card receivables and even student loans will be bought at prices significantly below "par" or cost, and prospectively at levels allowing for capital gains. This is a Wall Street-friendly package only to the extent that it frees up funds for future loans and economic growth. Politicians afraid of parallels to legislation that enabled the Iraq war are raising concerns about a rush to judgment, but the need for speed is clear. In this case, there really are weapons of mass destruction -- financial derivatives -- that threaten to destroy our system from within. Move quickly, Washington, with appropriate safeguards.

The Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street, as lending capacity and confidence is restored to our banks and the delicate balance between production and finance is given a chance to work its magic. Democratic Party (http://www.washingtonpost.com/ac2/related/topic/U.S.+Democratic+Party?tid=informline) earmarks mandating forbearance on home mortgage foreclosures will be critical as well. If this program is successful, however, it is obvious that the free market and Wild West capitalism of recent decades will be forever changed. Future economic textbooks are likely to teach that while capitalism is the most dynamic and productive system ever conceived, it is most efficient over the long term when there is another delicate balance -- between private incentive and government oversight.

The writer is chief investment officer and founder of the investment management firm PIMCO.

Nightfyre
09-24-2008, 12:32 PM
this statement is fundamentally flawed. If these securities would yield so much at 65 cents on the dollar, why have they not been sold? The market indicates that they are not WORTH 65 cents on the dollar. The market is a far better indicator of price than a CIO, or any person, agency or government.

eazyb81
09-24-2008, 12:34 PM
this statement is fundamentally flawed. If these securities would yield so much at 65 cents on the dollar, why have they not been sold? The market indicates that they are not WORTH 65 cents on the dollar. The market is a far better indicator of price than a CIO, or any person, agency or government.

Actually, I'd say your viewpoint is flawed if you cannot differentiate between a market price today and a market price a week, month, or year from now. You can talk theory all day long, but the facts have been laid out and it's fairly easy to understand.

SBK
09-24-2008, 12:36 PM
There is no way that this will work out for taxpayers. If it would there wouldn't be a desire for no accountability, for immediate payment without a plan of action, deadline, etc...

eazyb81
09-24-2008, 12:37 PM
There is no way that this will work out for taxpayers. If it would there wouldn't be a desire for no accountability, for immediate payment without a plan of action, deadline, etc...

Good rebuttal. Ignore the entire argument and just keep typing out your conspiracy theories. Good Lord....

Nightfyre
09-24-2008, 12:38 PM
Actually, I'd say your viewpoint is flawed if you cannot differentiate between a market price today and a market price a week, month, or year from now. You can talk theory all day long, but the facts have been laid out and it's fairly easy to understand.

So you are suggesting we should fix the price of bad debt? :eek:

banyon
09-24-2008, 12:39 PM
I like how your thread title is in scare quotes. That is appropriate.

eazyb81
09-24-2008, 12:40 PM
So you are suggesting we should fix the price of bad debt? :eek:

Of course not, but you calling this statement from Bill Gross "fundamentally flawed" is downright hysterical.

Nightfyre
09-24-2008, 12:41 PM
Of course not, but you calling this statement from Bill Gross "fundamentally flawed" is downright hysterical.

Bill Gross is espousing the belief that the government should buy up bad debt at 65 cents on the dollar. That is effectively price fixing.

eazyb81
09-24-2008, 12:43 PM
Bill Gross is espousing the belief that the government should buy up bad debt at 65 cents on the dollar. That is effectively price fixing.

No, he said 65 cents on the dollar was a rough average. Some could be bought at 80 cents, some could be bought at 30 cents. Overall, the Treasury would buy these assets at a significant discount, and would have the ability to hold on to them until the market came back and would not have to write them down like the banks are forced to due to FAS 157. I'm not sure why this concept is so hard for some to understand.

SBK
09-24-2008, 12:43 PM
Good rebuttal. Ignore the entire argument and just keep typing out your conspiracy theories. Good Lord....

I'm against any kind of bailout.

Add in the way this one is being proposed, and what is being asked.....

SBK
09-24-2008, 12:45 PM
No, he said 65 cents on the dollar was a rough average. Some could be bought at 80 cents, some could be bought at 30 cents. Overall, the Treasury would buy these assets at a significant discount, and would have the ability to hold on to them until the market came back and would not have to write them down like the banks are forced to due to FAS 157. I'm not sure why this concept is so hard for some to understand.

Why not just allow banks to not write down everyday? I posted that in another thread.

Save $700,000,000,000 of taxpayer money too.

eazyb81
09-24-2008, 01:03 PM
Why not just allow banks to not write down everyday? I posted that in another thread.

Save $700,000,000,000 of taxpayer money too.

So go back to mark-to-model?

Nightfyre
09-24-2008, 01:09 PM
No, he said 65 cents on the dollar was a rough average. Some could be bought at 80 cents, some could be bought at 30 cents. Overall, the Treasury would buy these assets at a significant discount, and would have the ability to hold on to them until the market came back and would not have to write them down like the banks are forced to due to FAS 157. I'm not sure why this concept is so hard for some to understand.

So, if it's such a good deal, why aren't the people with the cash buying it out already?

PS. What is the function of a Balance Sheet? Is it not: To display a person or company's balances as of the date it is prepared? Is FAS 157 not furthering that goal by giving the BEST possible estimate of an entities assets as of that moment? Bitch about mark-to-market, but the market is the most efficient way to value a security.

The simple answer to all of this is that these companies over invested in risky securities and got their ass handed to them. Better diversification and risk assessment techniques should have been used. The bubble was predicted in 2002.

eazyb81
09-24-2008, 01:28 PM
So, if it's such a good deal, why aren't the people with the cash buying it out already?

Too much uncertainty. No private firm has anything close to $700B at their disposal, so buying them chunk by chunk at this point is fruitless until you have the backing of the Treasury. Once the Treasury commits to this plan, I guarantee a flood of PE firms will enter this space.

PS. What is the function of a Balance Sheet? Is it not: To display a person or company's balances as of the date it is prepared? Is FAS 157 not furthering that goal by giving the BEST possible estimate of an entities assets as of that moment? Bitch about mark-to-market, but the market is the most efficient way to value a security.

No doubt, but I also think a reasonable person could see how FAS 157 is having such a tremendous impact on this crisis. If this rule isn't helping anyone, why is it in place?

I think we need to develop a function where mark-to-market and mark-to-model can meet in the middle, and I have no doubt FAS 157 will be changed once this mess subsides.

The simple answer to all of this is that these companies over invested in risky securities and got their ass handed to them. Better diversification and risk assessment techniques should have been used. The bubble was predicted in 2002.

I don't think anyone with a clue would disagree with you here. This is what I've been saying over and over on here, except the 2002 part. But at this point we need to deal with what's on the table right now, and understand the deal Bernanke and Paulson have on the table.

Nightfyre
09-24-2008, 01:36 PM
Too much uncertainty. No private firm has anything close to $700B at their disposal, so buying them chunk by chunk at this point is fruitless until you have the backing of the Treasury. Once the Treasury commits to this plan, I guarantee a flood of PE firms will enter this space.

I really think this is the only place we disagree. The liquidity problem is a sign of companies being hesitant to buy because of the risk. As an investments price is merely the sum of all outcomes weighted by probability and adjusted to present value, the increase in risk reduced the price to the point where these companies don't want to sell them. Thus, they want the government to come by them out at a premium by any experts analysis, or else the experts would have bought them.

No doubt, but I also think a reasonable person could see how FAS 157 is having such a tremendous impact on this crisis. If this rule isn't helping anyone, why is it in place?

I think we need to develop a function where mark-to-market and mark-to-model can meet in the middle, and I have no doubt FAS 157 will be changed once this mess subsides.

The people being helped by the rule are investors trying to value a company. JMO.

I don't think anyone with a clue would disagree with you here. This is what I've been saying over and over on here, except the 2002 part. But at this point we need to deal with what's on the table right now, and understand the deal Bernanke and Paulson have on the table.

tiptap
09-24-2008, 03:58 PM
So what is being said here is that the US buys up this bad debt and what are the chances that in pursuit of recovery the whole force of the US investigative power is turned toward Main Street. We have had a long history of not creating debtors prisons. In the extreme this could trend that way.

SBK
09-24-2008, 04:00 PM
So go back to mark-to-model?

Temporarily I think that makes sense.

tiptap
09-24-2008, 09:33 PM
So if I came up with a thousand dollars could I buy one of these Radioactive parcels? I mean is it that you don't think I could work out the bet being offered. Isn't that part of this. It is a bet and you have to have a pot in order to get any action to begin with. If no one is really following the game there is no real collateral. It is derivative to the actual asset being bet on that will go up or down.

BucEyedPea
09-24-2008, 09:51 PM
this statement is fundamentally flawed. If these securities would yield so much at 65 cents on the dollar, why have they not been sold? The market indicates that they are not WORTH 65 cents on the dollar. The market is a far better indicator of price than a CIO, or any person, agency or government.

Exactly! Bernanke and Paulson are pulling a fast one on us here.

BucEyedPea
09-24-2008, 09:54 PM
Actually, I'd say your viewpoint is flawed if you cannot differentiate between a market price today and a market price a week, month, or year from now. You can talk theory all day long, but the facts have been laid out and it's fairly easy to understand.

Those aren't facts. Or theory. That's someone's opinion on the value. We all know how that one goes in real life. If it's not moving and sits on the market the price needs to come down a LOT more. They could even be worthless. Lehman Bros was bought out. That worked. This is nothing but the market doing the regulating here. Quit tryin' to defy gravity.

BucEyedPea
09-24-2008, 09:55 PM
But at this point we need to deal with what's on the table right now, and understand the deal Bernanke and Paulson have on the table.

A bill of goods. Fraud.

Taco John
09-24-2008, 10:18 PM
this statement is fundamentally flawed. If these securities would yield so much at 65 cents on the dollar, why have they not been sold? The market indicates that they are not WORTH 65 cents on the dollar. The market is a far better indicator of price than a CIO, or any person, agency or government.



People are too stupid and idealistic to understand that. These people might as well think that you can lasso clouds in order to control the weather.

'Hamas' Jenkins
09-24-2008, 10:22 PM
Look, it's another one of these:

http://www.coxandforkum.com/archives/05.05.08.BillofGoods-X.gif

tiptap
09-25-2008, 07:22 AM
http://finance.yahoo.com/banking-budgeting/article/105838/Plan%27s-Basic-Mystery-What-Is-All-This-Stuff-Worth

Is this article tilted. It talks about the bad loans with actual houses as collateral. Those assets are worth buying. But then it goes on to talk about other investments.

______________________________________________

"The Bear Stearns bonds are just one example of the kind of assets the government could buy, and they are by no means the most complicated of the lot. Wall Street took bonds like those of Bear Stearns and bundled and rebundled them into even trickier investments known as collateralized debt obligations, or C.D.O.'s

"No two pieces of paper are the same,"said Mr. Feltus of Pioneer Investments.

On Wall Street, many of these C.D.O.'s have been selling for pennies on the dollar, if they are selling at all. In July, Merrill Lynch, struggling to bolster its finances, sold $31 billion of tricky mortgage-linked investments for 22 cents on the dollar. Last November, Citadel, a large hedge fund in Chicago, bought $3 billion of mortgage securities and other investments for 27 cents on the dollar.

But Citigroup, the financial giant, values similar investments on its books at 61 cents on the dollar. Citigroup says its C.D.O.'s are relatively high quality because they were created before lending standards weakened in 2006.

A big challenge for Treasury officials will be deciding whether to buy the troubled investments near the values at which the banks hold them on their books. That would help minimize losses for financial institutions. Driving a hard bargain, however, would protect taxpayers.

"Many are tempted by a strategy of trying to do both things at once," said Lawrence H. Summers, a former Treasury secretary in the Clinton administration. As a hypothetical example, Mr. Summers suggested that an institution could have securities on its books at $60, but the current market price might only be $30. In that case, the government might be tempted to come in at about $55."


__________________________________________________________________

And it is this type of investment that gets positive play with some Hedge fund supposedly buying but concerns me as vastly being totally worthless. A bet that has already lost. I mean a bet. And people are looking for their winning against that bet. And yet this kind of paper debt is what will be bought up first most likely. And in part because some of this exists on the books of Money Market Funds. And that is the catch.

tiptap
09-25-2008, 07:28 AM
So here is my solution. We need to invest in the infrastructure and Main street has to be at the front of line in having a chance to invest in those investments. The financial market only get revenue for servicing and husbanding that. Big wigs don't get to "pull out a plum," going forward until they have shown that they can enhance Main Streets presence in real assets. Hedge Funds and such don't get to be at the front of the line. Those assets invested in should reduce our dependence on oil and especially foreign oil. That savings will be the return. In exchange these Radioactive investments get removed to allow an advancement of these goals. Done in step so to see that progress toward those goals are working.

I realize real world set doesn't work that cleanly. But it is a clean image that Wall Street needs most and the hard work to advance this would go along way to win back respect.

eazyb81
09-25-2008, 07:43 AM
Those aren't facts. Or theory. That's someone's opinion on the value. We all know how that one goes in real life. If it's not moving and sits on the market the price needs to come down a LOT more. They could even be worthless. Lehman Bros was bought out. That worked. This is nothing but the market doing the regulating here. Quit tryin' to defy gravity.

So what part do you disagree with? Do you truly think these assets will not go back up in a year or so once housing bottoms and starts to trend upwards again? Or do you disagree that the Fed will be able to purchase them for such a discount?

People like you are so annoying to talk with because you disagree, come up with crazy conspiracy theories like Bernanke and Paulson are trying to pull a fast one, and do absolutely nothing to back up that point. If you truly don't understand what the situation is here, that's fine, but sit back and listen rather than trying to sound like you do.

tiptap
09-25-2008, 07:46 AM
If BEP didn't go in detail enough, have I.

eazyb81
09-25-2008, 07:47 AM
If BEP didn't go in detail enough, have I.

I don't understand how your point addresses the plan at all and whether it will help Main Street or not. Investing in infrastructure is not going to unseize the credit markets, keep unemployment below 30%, and keep normal Americans in their homes.

Friendo
09-25-2008, 07:48 AM
So here is my solution. We need to invest in the infrastructure and Main street has to be at the front of line in having a chance to invest in those investments. The financial market only get revenue for servicing and husbanding that. Big wigs don't get to "pull out a plum," going forward until they have shown that they can enhance Main Streets presence in real assets. Hedge Funds and such don't get to be at the front of the line. Those assets invested in should reduce our dependence on oil and especially foreign oil. That savings will be the return. In exchange these Radioactive investments get removed to allow an advancement of these goals. Done in step so to see that progress toward those goals are working.

I realize real world set doesn't work that cleanly. But it is a clean image that Wall Street needs most and the hard work to advance this would go along way to win back respect.

yep--something to that effect.

tiptap
09-25-2008, 08:58 AM
I don't understand how your point addresses the plan at all and whether it will help Main Street or not. Investing in infrastructure is not going to unseize the credit markets, keep unemployment below 30%, and keep normal Americans in their homes.

I didn't leave it at just investing in infrastructure. That was a poor reading. I said in exchange for un seizing there has to be a real demonstration of putting America first in investment for American needs. You want only to look at the liquidity question and liquidity at Wall Street that has to lead recovery. That is a very narrow and unimaginative view. I am not saying we shouldn't do it that way but there are real investment consequences going forward that looks nothing like the frenzy feeding of the last 8 years IN THE CAPITAL market.

patteeu
09-25-2008, 09:20 AM
I didn't leave it at just investing in infrastructure. That was a poor reading. I said in exchange for un seizing there has to be a real demonstration of putting America first in investment for American needs. You want only to look at the liquidity question and liquidity at Wall Street that has to lead recovery. That is a very narrow and unimaginative view. I am not saying we shouldn't do it that way but there are real investment consequences going forward that looks nothing like the frenzy feeding of the last 8 years IN THE CAPITAL market.

How about in return for un seizing the credit market, we establish a timeline for retreat from the Freddie Mac/Fannie Mae style big government interference in the lending industry that led to this mess instead?