RSSHere's the Tab
By David Fry | September 23, 2008 | 7:32 PM | 2 Comments
HERE’S THE TAB
All eyes were glued on senate testimony today which should have featured an optimistic Turnaround Tuesday. But, no, as such it was a flop despite some intraday attempts to rally.
The only thing that reversed course today was profit-taking in gold and oil.
What’s the problem? No one can get their hands around the bailout deal or its ramifications.
Volume picked-up slightly from yesterday’s low level but breadth, to be blunt, sucks. Investors don’t know whether to
______ or go blind.
I woke up this morning earlier than usual because something was troubling me. It’s this so-called bailout. I don’t understand it.
The devils in the details and we just don’t know them. It’s troubling.
Option A. The government decides to buy distressed debt securities from banks and others at their current market value then it seems to me these institutions have no incentive to participate.
Option B. The government pays the MTM [“marked to a model”] market value creating a bailout of epic proportions.
Which option is contemplated?
In the latter circumstance the government would take their time in selling these securities hopeful that time will cure and increase their value. This would lessen the taxpayer liability but create a historically significant Moral Hazard.
Now the pressure for all this comes from the reality that these pricing structures are a sham and lie to carry these securities on balance sheets at MTM levels. The pressure to change this comes from investors knowledgeable of this deceit and by the FASB [Federal Accounting Standards Board] with the latter forcing these institutions to mark these securities to market. The latter organization has, given overwhelming pressure, extended the deadline for doing this by roughly one year.
It was commonplace for many financial institutions over the years to carry many conventional mortgage products on their books at cost. There wasn’t anything unusual until derivative mortgage products, abetted by fee-conflicted and misguided rating agencies and monoline insurance firms, started to litter the books of financial institutions.
If the government takes these securities from banks at their MTM value a huge taxpayer liability is created not to mention another government agency run by inept bureaucrats.
But, what would happen if these institutions were allowed to keep these securities on their books at some form of “modified” MTM values? The understanding would be that they’d be worked off over time with no similar new issues created and issued. In this case a large taxpayer bailout would not take place and no new government agency created.
These institutions would be hamstrung going forward in operating their businesses but others would step-in to fill the void. That’s what happens in capitalism.
More importantly only a limited Moral Hazard is created.
What am I missing here? Post your comments or email me: dave@etfdigest.com.
Perhaps one answer is the problem is much larger than us commoners know. It’s said there exists $65 trillion [with a “T”] of CDS issues floating about without any knowledge as to their worth. After all it would take a lot for certain politicians to be speechless [think Chuck Schumer].
It must be that they know something we don’t.
Have a pleasant evening.
Disclaimer: Among other issues the ETF Digest maintains long or short positions in: SDS, QID, SMN, SDP, SIJ, IEF, DGP, GLD, EFA, EFU, EEM, EEV and FXI.
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