Bernanke's $700 Billion Bazooka
Just now, Chairman Ben Bernanke said "This is a matter for psychology."
I was a Psych major, and a pro trader. I can speak to this.
We should talk about the crisis of confidence at work here; that too often gets lost in the noise. Ultimately, there's no "real" price for anything. Not even gold.
Treasury Secretary Hank Paulson wants $700 billion - a number that says "The government is going to take this entire problem down, all at once."
If you do it $150 billion at a time, the Treasury will end up with more than $700 billion on its books. $700 billion is intended to get guys like Warren Buffett to step in - guys who'll be thinking, "No sense letting the government sop up the excess returns generated by holding these things to maturity; I'll buy them myself, before the morons from Treasury get here."
$700 billion is a bazooka. If you arm your Treasury Secretary at all, you give him a bazooka, rather than a BB gun, precisely because you don't want him to have to shoot.
A BB gun invites invasion. A bazooka makes a point. I'm not in favor of government intervention at this point, but, if it's going to happen, it should happen big. That $700 billion was shooting for a comprehensive solution.
For the people selling, the difference between Congress going for the whole megillah or doing it in tranches is this: In tranches, every block that gets used up makes it less likely that another one is coming (because you gotta go back to Congress to beg some more). In effect, the government would eliminate a certain block of toxic assets but, in so doing, would make the rest of the group even more toxic (and therefore less likely to be backstopped by the government, and still untouchably by private hands).
If the government lays out all $700 billion, the last asset sold should, in theory, be at the same price or more expensive than the first. The illusion of the "holdouts" rising in value will, in theory, inspire private equity to get on board.
If the government does this in tranches, there will be literally no end to the outflow. If they do it in one, enormous, statement-making block, it's possible the system will start running again.
Either one hurts, but these are your choices, as a taxpayer: Do you want to get shot by a BB gun 10,000 times, or once by a bazooka? Now consider the same choice - but with the possibility that choosing the bazooka means there's a remote chance you won't get shot at all.
It would seem "Letting the Actual Criminals Get Shot" isn't a choice anymore. That being the case, I'll take the bazooka - and hope that I'll get lucky and escape being blasted at all.
Is there another Bear Stearns out there?
Minyanville's Buzz & Banter- 14 day FREE Trial
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2009 Minyanville Media, Inc. All Rights Reserved.
One other small point the government is already a partner with every company operating in the USA. They recieve taxes that often far outpace the earnings actually recieved by the shareholders. Look at exxon mobile for a good example. My point is the government already gets 15-35 percent of these companies earnings so get them profitable will make the government far more money than if they handicap them by taking ownership.
When a CEO gets a 40 million dollar pay out the government gets a very good chunk of his money through taxes.
That aside, how do you figure the government will "sop up excess returns by holding these things to maturity?" The very design of this program seems to force the Treasury to overpay madly for assets by establishing some mythical "held to maturity" price. I am thinking that these assets will later be sold back to the banks in question at spectacular losses to the taxpayer, effectively giving every bank that wants to participate in this sham a massive put.
Frankly, all the prognostications that the economy will "freeze up" are lies. You think people will stop buying groceries? Knock it off. Everything that Bernanke and Paulson and crew have predicted thus far has been either dead wrong or patently false or both. There is absolutely no reason to believe either one of them now.
The very best thing that could happen in America today would be for all 535 members of the House and Senate to stand up as one and say, "our constituents don't want this, and we're not doing it. Take your bailout and shove it." Now THAT would restore my faith in democracy.
Go on, warn away about the disaster that will result. You'll never convince me it would be worse than the disaster that awaits after this nonsensical boondoggle passes.
minyan 2 bear
What else did Bernanke say after he waved his hands like a magician?
He said:"Putting capital into healthy or reasonably functional banks might frighten off private money that could come in."
Mr. Macke, if you are a patriotic American, you would realize that this is Bernanke telling us that again, we will "privatize the profits and socialize the losses".
Just think of Uncle Sam as Warren Buffet, except with even deeper pockets. If Warren Buffet was going to loan money as he did with GS, he would demand that he get a share of the profits should GS profit.
If Uncle Sam invests/loans money to your crooked Wall Street associates, Uncle Sam should reap the rewards of taking on the huge risk of rescuing an insolvent bank.
Uncle Sam must demand ownership in any company that we lend to, it is that simple. You are only adding to the noise with this pathetic post.
I resent you Mr. Macke for trying to say this bailout is necessary to save the market. It will not. This is the greatest bull trap being laid in history. The market will collapse either because the Chinese will demand higher interest rates or it will collapse because these banks like JPM are just as insolvent as LEH.
Just like the crash of 1929 when investors were leveraged 9:1 the crash of 2008 will happen whether you like it or not because investors are even more leveraged this time. You can not change math.
Someone needs to be an honest negotiator for Uncle Sam in this crisis. We will all benefit if Uncle Sam gets a piece of the action, not just a few with connections to the crooks.
I'd rather socialize the profits too thank you very much.
Minyan Mike Kernan
Responsible Citizen
I like a good rant. I'll even spew a rant or two for my supper later. But for my trades, I just want opportunities. If and when the government decisively breaks the market, I'll tearfully short. If, by some dual miracle, they both fix the market and I'm smart enough to recognize the fact, I'll buy stock and crow about it.
As is, I'm simply sitting on the sides, pondering what the Big Dumb Federal Animal is going to do. Until It decides, I simply don't see an edge one way or the other.
If I went to get my oil changed (perish the thought, I turn my own wrenches - but I digress) and some bozo at the garage made a hash of it, I'm not likely to take the vehicle back to the garage to get anything more serious attended to - like, say, my brakes.
If someone can't handle the smaller crises, how can they be expected to handle the larger ones? I sound like my dad, but it's true.
Bazooka Hank already got his bazooka blank check, on the premise that it would not need to be used. That premise was shattered in a matter of days, as the projectile corkscrewed down the corridors of Wall Street.
BH isn't asking for another bazooka, or even a Panzerfaust or a Stinger missile. No, he wants a tactical nuke, and there's no question in my mind that he'll use it. Guy Adami seems to think that it'll be a magical money-generating Louisiana Purchase kind of nuke, but I'm pretty sure it'll be the regular kind.
Another angle is this: I have to mark my assets to market at the close of trading, every day. So do you. Wall Street "successes" apparently aren't expected to suffer this indignity - instead, they make crazy money when their obscenely leveraged Ponzi schemes work, and get a massive taxpayer-stolen cushion when their hyper-risky bets stop paying off.
Wrong is wrong, and no talk about the theoretical necessity of this package will stop it from being wrong. The root of the problem is that people took out mortgages they couldn't afford. Address that problem with a mortgage resolution trust if you must, and let the Wall Street gamblers man up and take their medicine - not steal from you, me, and everyone born in the next 100 years.
The things that provide life to people are valuable. The things that don't are not. We can create new banks with our labors and lives. We cannot create new labors and lives by creating new banks.
Screw the rich buzzards. They've been picking the bones of people far too long and it's time to let them die.
There was an 'expert' on public radio this morning saying the government should approach this from the bottom up by putting the 700 billion into directly refinancing mortgages for people (at market prices) instead of bailing out failed institutions. He then went on to say that the next president and Congress will have to find a way to simplify the financial system.
I think he needs to listen to himself. If we are to solve this problem while simplifying it, then the means to do so is at hand: let Congress go on recess and tell Paulson to come back when he's rebuilt the local economies of the country enough to pay for his plan. That means the weenies need to give something back to their communities that didn't belong to them: the money which represents their labors and hasn't been used to build oversized, overpriced homes.
Better to let the towns and villages tear those monstrosities down and build smaller homesteads with gardens and windmills.
We don't need to keep fooling ourselves with the myth of perpetual Growth.
Push the "Reset" button.
Dad: "It was never there to begin with. Those numbers are the prices of stocks that people pay in the BELIEF that there will be more money and bigger fools to buy them later."
Ditto the derivatives.....
What if the money was never really there? What if the government doesn't actually HAVE 700 billion dollars to pay for the money that was never really there?
How far down this rabbit hole do we send our children before we get back to work at plowing the fields and growing the food?
The woodchuck is gone, the rabbit that lived in the hole is gone, and the fox that ate the rabbit already moved on. We just have the hole in our pocket.
I hadn't considered that.
As just another minyan sitting in cash. I would love to see a trade, even a small long trade, like maybe 10k of Dell at $16 for $1.50.
What do you think Prof. Macke?
minyan 2 bears
In short, it was designed to destroy labor while preserving capital. Exactly what Paulson has in mind.
I have two professions. One is trading the other is wearing make-up and running my mouth.
What's going on in DC is horrible for the former but pretty good for the latter. A nice personal hedge, however it might be characterized.
So the US is already the conservator/owner of the Freddie Mac,Fannie Mae 6 trillion in mortgages/guarantees, of which over 4 trillion is in mortgage guarantees.
On the one hand the US will be buying mortgage securities one way or the other. But it already is on the hook for 6 trillion of the 12 trillion total US mortgage market. I just hope FMFM did not guarantee the same mortgage more than once.
On the other hand, is any entity dealing with Credit default swaps or interest rate swaps above water in the end of this?
they need to facilitate the trading of these assets rather than take them on. what is proposed will delay recovery for years and lead to hyperinflation if not outright revolution.
what is sad is plenty of people have seen this coming for years and years and years with no action until we are looking into freefall. those of us who have acted upon this and are fiscally prudent will still get stuck with the bill.
oh, and the $700B will not solve the problem either. but it will take a while before they figure that out.
The problem with just promising to do some kind of deal beforehand is that the market will immediately discount that and just move along. Buying *truly* distressed assets at good prices will give a psychological boost to the market while letting the market find the actual price based on that psychological impact, and not just merely a trivially quantifiable $700B injection.
