This “bailout” boils down to a question of whom you trust: Hank, who has made a fortune on being one step ahead on complex deals, or Congress, which has proven itself useless beyond belief.

Go Hank Go!

p.s. When all is said and done, George Bush’s greatest achievement as President – appointing Hank Paulson as Treasury Secretary.

Suppose I own 100 billion of illiquid mortgage-based instruments – face value of course. If I end up selling 5 billion to the Treasury, at face value, I have 5 billion in the bank, but 95 billion of toxic debt still on its books. Not much of a change – it is a bit worse than getting a straight cash injection from the treasury.

Suppose I sell the Treasury 20 billion dollars, by lowering my price to 25 cents to the dollar. I still only get 5 billion (this is on average what the markets should get from the Treasury), but I now have to mark down the remainder of my toxic debt to the market value – 25 cent to the dollar. That’s a book loss of 60 billion dollars, added to the realized loss of 15 billion I just took on the the sale to the treasury. If I could affort this kind of write-down, I would not be in trouble in the first place, would I?

So banks may be significantly worse off after they sell part of their debt to the Treasury than before.

Another issue is who gets to sell. In the example, I assumed that I get an “average” bailout. But in reality, the climate of fear will drive the prices low enough that only healthy institutions can withstand the write-down that follows the sale. If I am well-capitalized or I have a small amount of toxic assets, I can get rid of all my cruddy assets, and I can move on. If I am already weak, and I have a significant amount of toxic assets, I am stuck with them, and I may go under in the writedown that follows the “bailout”. Weak institutions won’t get to sell to the treasury.

It is almost guaranteed that the “bailout” will create an solvency crisis out of a liquidity crisis, if anything like a free and transparent process is used to determine who gets to sell what.

1. these securities were ever vermeers. they weren’t. they were always crap. they’re not worth the paper they’re printed on. the reason wall street wants to dump them is because no one can sort them out. but our inept government is going to do the job? right.

2. the government will put these together, and then be able to restructure loans. i don’t know if you’ve followed the bailout negotiations much, but this idea was proposed and rejected. they wanted to write this into the plan, and said no, we’re not going to be able to do this. but you make it sound like they will.

the truth is that this plan was written as obscurely as possible, because it’s not going to work. it’s a money grab, pure and simple.

THERE HAS NOT BEEN AN EPIDEMIC OF ANALYTICAL AMNESIA. THE DATA SUFFICIENT TO VALUE THESE ASSETS IN 2005 IS ALL AVAILABLE TODAY. IT IS ONLY THE ANSWER THE CURRENT ASSET OWNERS DON’T LIKE. THE INDUSTRY AWARDED THEMSELVES HUMUNGOUS BONUSES BASED ON THESE ASSETS ROUTINELY THROUGH 2006. HAVE YOU HEARD ANY OF THEM ANNOUNCE THAT THEY WERE IDIOTS BACK THEN AND RETURN THEIR BONUS MONEY TO THE SHAREHOLDERS? THIS IS JUST MORE BALONEY.