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"It is an idea of a plan more than an actual plan"
Again, I'm hardly a person to have any idea what to do on this matter. I think this is a situation where "getting us out of this mess in a way that provides the greatest good to the greatest number" needs to trump "make the outcome fair," but people are questioning whether the plan will do either, or whether the people creating it know what they're doing, whether it really is a plan.
Markets Soar, but New Rules Upset Traders
Some traders said they were no longer betting on the intrinsic health of companies, but rather on what the government might do next. Others simply withdrew from the market.
Joe Nocera: Hoping a Hail Mary Pass Connects
as the day progressed it became increasingly clear that the Treasury Department didn't yet know how this mechanism was going to work. It is an idea of a plan more than an actual plan. In football, they would call it a Hail Mary pass. Sometimes, of course, a Hail Mary pass is completed for a touchdown. But most of the time they fail.
Paul Krugman: Uneasy feelings and No Deal
It seems all too likely that a "fair price" for mortgage-related assets will still leave much of the financial sector in trouble. And there's nothing at all in the draft that says what happens next; although I do notice that there's nothing in the plan requiring Treasury to pay a fair market price. So is the plan to pay premium prices to the most troubled institutions? Or is the hope that restoring liquidity will magically make the problem go away?
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There's no quid pro quo here — nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving.
Markets Soar, but New Rules Upset Traders
Some traders said they were no longer betting on the intrinsic health of companies, but rather on what the government might do next. Others simply withdrew from the market.
Joe Nocera: Hoping a Hail Mary Pass Connects
as the day progressed it became increasingly clear that the Treasury Department didn't yet know how this mechanism was going to work. It is an idea of a plan more than an actual plan. In football, they would call it a Hail Mary pass. Sometimes, of course, a Hail Mary pass is completed for a touchdown. But most of the time they fail.
Paul Krugman: Uneasy feelings and No Deal
It seems all too likely that a "fair price" for mortgage-related assets will still leave much of the financial sector in trouble. And there's nothing at all in the draft that says what happens next; although I do notice that there's nothing in the plan requiring Treasury to pay a fair market price. So is the plan to pay premium prices to the most troubled institutions? Or is the hope that restoring liquidity will magically make the problem go away?
...
There's no quid pro quo here — nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving.
Um...
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Enjoy the absurdity: Billions in unregulated derivatives that were about to take down the insurance company that sold them were bought by banks to get around their regulatory capital requirements intended to rein in risk.
Got that?
Which brings us to Item 2 for policy makers. Stop pretending that the $62 trillion market for credit default swaps does not need regulatory oversight.
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Bernanke-Paulson economic policy:
Reduce the size of risk premia to normal levels and raise the value of risky assets to normal levels and so restore solvency to the financial system by having the government buy up risky assets, and so shrink the supply of outstanding risky assets for the private sector to hold.
The problem is to keep Bernanke-Paulson economic policy from becoming:
Restore solvency to the financial system by taking tax money and using it to buy underwater assets for more than they could ever be worth.
Me: The question would be how could the plan stanch the bleeding unless you do the latter?
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viz that this is no longer a solvency crisis and now purely a liquidity crisis
it's interesting (not to say maddening) that you do already hear fanatical free marketers angrily denouncing naysayers for "talking down the value" of the market against the general social good
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There are private investors willing to buy these troubled assets right now, but the banks do not want to sell at those prices. Why? Some banks believe the assets are worth more than the current bids (it all depends on future house prices, and different banks and investors have different projections). And many banks are unwilling to accept the current bids because the banks would then be insolvent...
So how does the Treasury plan help? It isn't clear yet. The first goal should be transparency of the troubled assets. What do the banks own, and what are the assets really worth?
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buying impaired assets at a steep discount reduces regulatory capital as losses are realized, and therefore will lead to less lending unless the banks are recapitalized.
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What I haven't heard anything about is how Treasury might recapitalize firms that will be bankrupt even with the purchase facility, yet need to be kept in being.
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The most obvious question: is how will paying market price for near worthless assets prevent the collapse of zombie institutions like Bear Stearns, Lehman Brothers and AIG? These institutions needed money. They won't get it from selling mortgage backed securities, that are chock full of bad mortgages, at the market price. We already know this, because they already had the option to do so.
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a big problem in the housing bubble financial flow was the fact the rating agencies accepted many false claims by the banks and therefore rated a lot of junk as investment grade debt. Has the Bush administration figured out how it will get around this problem with its reverse auction system?
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Why do we need the government to create a massive and costly effort to buy paper at market prices? Institutions can sell paper at market prices now. This is clearly ether a massive game of smoke and mirrors (f we are lucky) or a plan to buy bad assets at above market prices but somehow pretend that they are indeed correct.
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Officials who have briefed Congress on Treasury Secretary Henry Paulson's plan have suggested that one approach would be for the government to buy the toxic debt through a reverse auction process in which companies wanting to unload their mortgage-backed securities would propose a price to the government - say 50 cents on the dollar - and those offering the lowest price would win the bid.
By establishing a price for assets no one currently wants to buy, it could allow a market to develop and allow financial firms to get on with the effort of taking their losses and getting the damaged assets off their books.
Me: I don't understand the statement "those offering the lowest price would win the bid." Are different companies to offer their mortgage-backed securities at the same time? But how is one security equivalent to another? Who is doing the valuing?
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A: i think it highly unlikely that all securities would be pre-considered equivalent
B: possibly "lot 1" is announced and a self-selection of "bidders" (ie those wanting to offload) step forward with a selection of their wares, priced as they would like the price to be
C: the lowest of these "wins" and is bought at that price
D: "lot 2" is then announced, and ditto at B, except now a value marker has been established by "the market", and everyone can adapt round it (so all the bidders in "lot 2", responding to the outcome of "lot 1", would up their desired prices -- lowest would still "win", but would be a great deal higher;
E: after the initial -- tentative and possibly wildly inaccurate -- stabs at evaluation, perhaps helping create markers for different classes of security on offer, the lots will start to come thick and fast, and the market will start to balance itself...
so the answers to your questions (in this case) would be:
i: no -- those wanting to offload are caught between two needs, viz to offload (hence they want to "win" a bid), and to get the best price (they want someone else to lowball them, so they can go higher next time)
ii: hence effectively a torrent of successive reverse-auctions would be being set up, not one single massive "all securities at one price" auction; bidders would be claiming equivalency (possibly very inaccurately) in any given auction, but there'd be a chance of reset between any two auctions -- in particular, there'd be the chance for the 'lowest price winner' to jump a bit higher at each successive auction
iii: initially value is established by "auction technique" among those choosing to bid, viz via guesswork, experience, cunning etc... but gradually as the mini-auctions played out, "the market" would be establishing the value
this is a very wild guess, interpreting the obscure phrase you highlight -- one drawback is that it doesn't seem like it would be a QUICK process but that may not be a problem given the principle of "govt buys all"
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viz
A: a no-strings bailout* passed on a "bipartisan" basis, which when it all goes horribly wrong, dems are totally as compromised as repugs
B: a no-strings bailout which dems challenge -- the market then panics, falls way further, and blame for the catastrophe passes from the bush administration to those pesky partisan dems who refused to help in the bail-out
*which in current form includes a whole raft of no-blame anti-transparency elements to clear villains of any villainy that emerges; and to hold eg paulson to no account ever
if obama is VERY DARING INDEED -- and tho i admire him in many ways i don't know that he is daring in this particular way -- he will seize this RIGHT NOW as a New Deal Moment and campaign aggressively on that (because if he doesn't seize it now, but still goes on to win, whatever is put in place right now in the twilight of the bush kleptocracy will HUGELY limit his scope for new deal-ish, or reform, or ANY ACTION to correct the rot; the rot-as-is, in addition to a legally plumbed-in departing-bush-heist orgy of no-strings-welfare-for-the-well-off)
paulson may not be a rovian crook himself, but if not he is an honest man way out of his depth and very very surrounded by crooks -- conservative (viz anti-new deal) principles are being tossed aside in this proposal... but in a seemingly highly calculated and timed way, so that the inevitable bad outfall of this sudden pro-new-deal conversion (on the part of such very bad actors) counts deeply against any considered, thoughtful, radical nu-New Deal project being set in place once obama arrives, to an emptied treasury, a highly dysfunctional market, a straitened, flummoxed and angry middle class, oil and other energy crises burgeoning, the crooks fled with their booty, and wars begun and prepared now flaming up into full reality
i am not usually this gloomy or angry -- right at the start of the iraq war i said (mostly to myself) that i considered it the first shoe falling in the tumble of the american empire, the question really being would it be a gradual queasy decline or a chaotic rout... i hoped for the former, because we will all suffer if it's the latter, but the fall of empires is generally (historically) more awful than their advance, pitiless and cruel as that can be, and the state of grown-up politics at the core of the metropole (viz washington, wall street) is hopelessly decayed, morally and intellectually, and (beside the gangster warlords in the nascent rival empires, none of which are in a healthy state themselves, financewise) no one is standing in the wings pressing to take over
still, a week is a long time in politics, and maybe by next weekend everything will be sorted and fine again, blimey
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the plan does nothing to address the lack of capital unless the Treasury overpays for assets. And if that's the real plan, Congress has every right to balk.
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shouldn't [the plan] take the form of public injections of capital, in return for a stake in the upside?
Let's not be railroaded into accepting an enormously expensive plan that doesn't seem to address the real problem.
But the Dems seem thoroughly buffaloed.
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The Bush administration was a little slow to decide this was a massive crisis, but they reverted to form when they did. They want Congress to give them a blank check to do whatever they want, whatever the cost, with no one able to watch them closely.
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Here purchase price is crucial. What are the safeguards to prevent cronies and contributors from getting favorable deals, either in selling assets or in purchasing them?
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Among the worst mistakes made in the savings and loan crisis was to allow the institutions to devise special accounting rules, to make themselves look better than they were and to keep them going when they should have been closed down. You would think no one would want to repeat that, but there are rumors that banks are asking that Congress allow them to stop marking assets to market, on the theory that it was having to tell the truth about their bad decisions, rather than the decisions themselves, that caused this problem.