Article

2008-09-21 Home Front Economy

Treasury Seeks Authority to Buy $700 Billion Assets

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Posted by Steve White 2008-09-21 00:00|| || Front Page|| [10328 views ] Top

#1 The light hasn't dawned on them that T-bills are worthless. Nobody wants them even at sky high yields. The game is up, there is no $700B to spend.

Treasury can put those T-bills out there, but they are nothing but junk bonds.

Posted by Anonymoose 2008-09-21 00:31|| 2008-09-21 00:31|| Front Page Top

#2 That's the deal: Even if this bailout has congressional support, 100 percent, where's the Fed going to get the money and who will buy the treasuries needed to fund the loan?

You gonna relay on foreign countries to buy ever cheaper Fed debt?

Where are you going to get the money? Gonna raise taxes on all citizens and transfer the wealth to Wall Street?

Will that fly Nov. 4th, 2008?

Posted by badanov 2008-09-21 01:46|| http://www.freefirezone.org]">[http://www.freefirezone.org] 2008-09-21 01:46|| Front Page Top

#3 Sorry, but it should be restricted to US corporations only. Let other countries bail out their own. None of them would help ours out from stupid mistakes.

Posted by Cornsilk Blondie 2008-09-21 02:03|| 2008-09-21 02:03|| Front Page Top

#4 Suppose for argument's sake that the gov't manages to get this to work. Won't they own a very profitable business?

Posted by gorb 2008-09-21 03:27|| 2008-09-21 03:27|| Front Page Top

#5 Probably not 'very profitable', but it wouldn't surprise many people if some of this bad debt they purchase turns out to eventually be worth more than they paid.

The T-bill is a junk bond?

Please tell me you're not serious?

Posted by Mike N. 2008-09-21 07:12|| 2008-09-21 07:12|| Front Page Top

#6 Unlikely. The only way to make a profit is if the underlying real estate value exceeds the price the taxpayers are paying for the bad loans.

In the early 1990's the Savings and Loan bailout ended up costing taxpayers $125 billion out of the $500 billion taken over. Most of that in bad real estate loans. Extrapolate that to today's proposed $700 billion takeover and taxpayers will fork over $175 billion to the financial sector sharks and loan deadbeats.

A tiny portion of the bailout costs should be recovered by suing the crap out of the folks who profited handsomely from this. Unfortunately, they are too connected and have given too much campaign contribution money for the politicians to take any action against them.

Posted by ed 2008-09-21 07:29|| 2008-09-21 07:29|| Front Page Top

#7 On second thought, it will probably cost the taxpayers more than $175 billion. The government took over S&Ls with a total portfolio value of $500 billion. Not all of that was bad real estate loans. This time the gov proposes to take responsibility for $700 billion in risky real estate.

Posted by ed 2008-09-21 07:34|| 2008-09-21 07:34|| Front Page Top

#8 Moosey what would you have us do? Take the PU to the bank? Buy gold? Fishhooks? Likker? Gulp Bait? Call in the now defecting army and have the enforce the zoning laws. Jeeeeebus.

Moose that's nutz.

Posted by .5MT 2008-09-21 09:47|| www.cybernations.net]">[www.cybernations.net] 2008-09-21 09:47|| Front Page Top

#9 And sky-high yields on Teess?
LOL. rite.

No Cred for U!

Posted by .5MT 2008-09-21 09:52|| www.cybernations.net]">[www.cybernations.net] 2008-09-21 09:52|| Front Page Top

#10 A failure by the government to support the U.S. financial system could lead to ``a depression,'' Senator Charles Schumer told reporters in New York. ``To do nothing is to risk the kind of economic downturn this country hasn't seen in 60 years.'

Do you mean like suicides and greedy ~~Charlie Shumer~~ Washington politicians jumping out of skyscraper windows? And the downside is? Bring it on! I've got my Victory Garden ready to go!

Posted by Besoeker 2008-09-21 10:19|| 2008-09-21 10:19|| Front Page Top

#11 if you are doing the arithmatic on what the bailout will cost the taxpayer you have to factor in

- taxes paid by business with and without the bailout

- taxes paid by employees in the financial sector with and without the bailout

- taxes paid by people who buy and sell real estate with and without the bailout

Posted by mhw 2008-09-21 10:42|| 2008-09-21 10:42|| Front Page Top

#12 mhw...
what percentage of these workers will be voting for Obama?.... That needs to be factored in too.

Posted by 3dc 2008-09-21 12:52|| 2008-09-21 12:52|| Front Page Top

#13 .5MT: If you max out your credit cards, you can no longer buy things with them. The same applies to the US government. If it cannot get credit, and thus create debt, it *has* no more money. It *must* stop spending. It cannot just magically increase the debt. The money has to come from somebody else.

Most Americans, and even congress, are hypnotized to think that the US government can just make money out of thin air. It cannot do this.

Unless somebody loans them the money, they are instantly broke, bankrupt. They have already spent this years tax revenues, and then some.

The only alternative is to stop spending money already appropriated.

Literally, to shut down a broad section of the US federal government, and divert the money it was apportioned to the other parts, the vital parts, until the next tax quarter brings in more.

Call it a "holiday", if you like. As much as 25%, my guess, of the government, will have to shut down.

Posted by Anonymoose 2008-09-21 13:26|| 2008-09-21 13:26|| Front Page Top

#14 Too bad they don't address mark-to-market.

Posted by Mike N. 2008-09-21 14:34|| 2008-09-21 14:34|| Front Page Top

#15 The light hasn't dawned on them that T-bills are worthless. Nobody wants them even at sky high yields.
This is not true. Last week the Treasury auctioned off at least $100 billion in short term notes, over & above previously scheduled routine auctions. The terms varied from 7 days to about 6 months. Interest rates varied from 0.1% to 2%. The lower the interest rate, the higher the demand.
As long as all other financial institutions continue in very doubtful condition, the demand for Treasury notes will continue strong.
The real crunch would be if the full faith & credit of the USA becomes doubtful, at which point even Federal Reserve Notes (i.e, cash) will lose their value. There are so many financial entities manipulating values at this time, it is hard to know where to turn just to maintain the value of one's savings.

Posted by Anguper Hupomosing9418 2008-09-21 15:00|| 2008-09-21 15:00|| Front Page Top

#16 Probably not 'very profitable', but it wouldn't surprise many people if some of this bad debt they purchase turns out to eventually be worth more than they paid.

Black Swan has an interesting comment (after the usual boilerplate about how Bush is the anti-Christ - or would be, if BS were Christian):

If the banks were to receive $.60 on the dollar for their mortgage backed securities, it would be a total gift. Remember, Merrill Lynch "sold" its mortgage backed securities for $.22 on the dollar. ML also carried the paper. In other words, they gave the appearence that they got financial asbestos off their balance sheet, but in actuality, they were unable to sell it. ML had $30.6 billion of CDOs that were already marked down to $11.1 billion. Yet, they "sold" this garbage to Lone Star for 6.7 billion. That left Merrill Lynch taking another $4.4 billion write-down and 'selling' those securities at 22% of the original face value. If it were a real sale, it probably would have gone for $.05 on the dollar (it wasn't a real sale because Merrill still carried the liability for losses if the securities fell below $0.22 on the dollar - in essence, Merrill pledged the assets as collateral in exchange for a loan), or, possibly, couldn't have been sold at all.

The National Australia Bank (NAB) took a 90% writedown on its 550 million (AUD) in holdings of US mortgage debt. What it did was to admit that it's AAA-rated securities were virtually worthless. So what are these mortgages that the Treasury wants to buy with first $700 billion chunk of US taxpayer money worth? They are worth nothing. This is a gift from the former CEO of Goldman Sachs to his cronies. The first $700 billion increment of mortgages bought by the taxpayers will constitute a direct payment to the very banks that destroyed the American economic system. These mortgage backed securities will be collateralized by the absolute worst toxic waste the banks have been stuck with. Once in posession of this money, the banking elites can continue to pay themselves huge bonuses, while continuing the leveraged looting that became legal the day Bill Clinton Signed Phil Gramm's bill (Gramm-Leach-Bliley Act), a bill that vitiated the Glass-Steagall Act.

The problem with this deal is that real estate prices are still falling to historic norms, and all toxic instruments associated with them will continue to decline in value.

Posted by Zhang Fei 2008-09-21 16:23|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com] 2008-09-21 16:23|| Front Page Top

#17 The problem with this deal is that real estate prices are still falling to historic norms, and all toxic instruments associated with them will continue to decline in value.

They're already worth practically nothing, as the article notes. Assuming the Treasury pays practically nothing, they might not do too bad in terms of recovering a chunk of that 700 billion.

As for housing prices falling, yep. At the very least until next spring when the defaults begin to slow, then we can begin to work off the inventory glut.

Posted by Mike N. 2008-09-21 16:32|| 2008-09-21 16:32|| Front Page Top

#18 As for housing prices falling, yep. At the very least until next spring when the defaults begin to slow, then we can begin to work off the inventory glut.

I think it will take way beyond spring. Hong Kong has a shortage of land, and ten years later, prices are still 50% of what they were in 1997. This is in a place without zero down payment, option ARM loans and really high savings rates, where the population went from 1m in 1945 to 7m today. What that means is that any assets bought today have quite a way down to go. I suspect a big chunk of the items Merrill sold were the 20 portion of 80/20 loans (i.e. zero downpayment mortgages where the 80 (first claim) portion of those loans was sold, and Merrill hung on to the 20 (secondary claim) portion).

Posted by Zhang Fei 2008-09-21 16:49|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com] 2008-09-21 16:49|| Front Page Top

#19 Interest rates varied from 0.1% to 2%. The lower the interest rate, the higher the demand.

See Moose, the Fed's seems to be able to move easily. Please, please consider wtf you are posting. Many new posters think you know what the fuck you are talking about.

Posted by .5MT 2008-09-21 17:28|| www.cybernations.net]">[www.cybernations.net] 2008-09-21 17:28|| Front Page Top

#20 The real estate market is not uniform some areas will recover much quicker than others.

Posted by Frankenstein 2008-09-21 17:31|| 2008-09-21 17:31|| Front Page Top

#21 Curiously I don't see much discussion of the Community Reinvestment Act as a factor in the sub-prime crisis.

Posted by DMFD 2008-09-21 17:33|| 2008-09-21 17:33|| Front Page Top

#22 I rarely discuss that.

Posted by .5MT 2008-09-21 17:35|| www.cybernations.net]">[www.cybernations.net] 2008-09-21 17:35|| Front Page Top

#23 The Community Reinvestment Act probably contributed to this situation but likely was only a minor instrument. The 1st version of the CRA was in the 70s and it has been amended many times making it difficult to allocate specific blame to various sections of the law.

The execs at Fannie and Freddie deserve much of the blame as do others. The Bush administration tried to reform Fannie and Freddie in 2003 but they were thwarted (US Rep Barney Frank has claimed credit for the thwart).

Posted by mhw 2008-09-21 18:50|| 2008-09-21 18:50|| Front Page Top

#24 ZF: I suspect a big chunk of the items Merrill sold were the 20 portion of 80/20 loans (i.e. zero downpayment mortgages where the 80 (first claim) portion of those loans was sold, and Merrill hung on to the 20 (secondary claim) portion).

In plain English, in places like California, where median sale prices have gone down 30%, the secondary claims get nothing, and most holders of those debt securities don't even bother registering a claim, given the legal and procedural costs.

Foreclosure costs also take up a hefty chunk of the recoverable value of homes. Most foreclosures take months, and can take up to a year. Even after the foreclosure, the property can sit on the market for a while. During that time, squatters can leave their messes in the house, pipes can burst, mold can grow and thieves can strip the house of plumbing, electrical wiring, appliances, windows, and in the worst case, transients can burn it to the ground for kicks. The bottom line is that foreclosed properties can end up selling for a fraction of its reduced value. These are the hazards that a buyer of distressed assets faces. To buy them at anything like their real values, inspections and appraisals will have to made of portfolios of properties - something that will probably take many months - months during which property prices will continue to slide. And then there's the issue of unpaid utility bills, HOA bills and property taxes, all of which have to be paid, and will reduce the value of the home. The idea that the government will do a good job of getting value for money just isn't that high, especially when you consider the pay differentials between government and private sector employees. More likely, they (meaning we taxpayers) will get taken to the cleaners.

Posted by Zhang Fei 2008-09-21 19:14|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com] 2008-09-21 19:14|| Front Page Top

#25 mhw: The Community Reinvestment Act probably contributed to this situation but likely was only a minor instrument.

Barry Ritholtz says that in 2004, the SEC gave special dispensation for the five brokerages under siege to increase their leverage from 12 to 30. Notice how Piper Jaffray isn't in danger of going out of business. Notice how nobody's talking about AG Edwards getting wiped out.

Posted by Zhang Fei 2008-09-21 19:17|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com] 2008-09-21 19:17|| Front Page Top

#26 Moose: The light hasn't dawned on them that T-bills are worthless. Nobody wants them even at sky high yields. The game is up, there is no $700B to spend.

Treasury can put those T-bills out there, but they are nothing but junk bonds.

Actually T-bills are in great demand right now, because several money market funds have broken the buck (gone below $1 for every dollar of assets invested). The government's move to guarantee that money market funds will not break the buck has slowed down withdrawals from those funds. The problem is that if that guarantee persists, the temptation will be for those funds to invest in the riskiest securities (with the minimum required ratings) that they can find - in part to cover the insurance premium required by the government. A government guarantee for money market funds makes them a substitute for Treasuries. While yields for Treasury bills are at an all-time low, I expect a flood out of them into higher-yielding money market funds next week, meaning Treasury yields will spike.

Posted by Zhang Fei 2008-09-21 19:26|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com] 2008-09-21 19:26|| Front Page Top

#27 ZHANG

"..Notice how nobody's talking about AG Edwards getting wiped out."

Actually AGEdwards is owned by Wachovia and without the Treasury's action, Wachovia might go under.

Posted by mhw 2008-09-21 19:39|| 2008-09-21 19:39|| Front Page Top

#28 I think there's an urge to blame people who must have known this would happen and make them criminally liable. I think in this context, "know" is a strong word. I think they believed, as in every other financial mania (tulips, internet, et al), those fatal words - "This time, it's different". This is why a lot of CEO's rode their stock losses into the ground, and even bought more stock as their share prices fell. Everyone, from home buyers to mortgage securities investors, believed that home value to income ratios in America would start to approach the high levels of Europe and the rest of the developed world. They were wrong.

Nonetheless, everyone who bet money and lost during this financial bubble should not be allowed to shirk the consequences of his behavior. For one thing, giving him a free pass would give him an incentive to repeat this kind of unproductive risk-taking behavior in the future. For another, we taxpayers should not be responsible (and in any case, are too financially-strapped) for paying the bill for someone else's mistakes.

Posted by Zhang Fei 2008-09-21 20:09|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com] 2008-09-21 20:09|| Front Page Top

#29 mhw: Actually AGEdwards is owned by Wachovia and without the Treasury's action, Wachovia might go under.

You're right about AG Edwards 2007 takeout - my bad. Wachovia, however, will go under if the Treasury buys its assets at anything like their actual values. And that's the sticking point - if the Treasury's intent is to buy the assets for what they're actually worth, all they're doing is ensuring an orderly liquidation - and huge FDIC claims. If the intent is to rescue banks like Wachovia, they will pay much more than the assets are worth. And with the second option, taxpayers, not shareholders or bondholders, will take the hit and the management team that took the company to the cleaners will remain intact.

Posted by Zhang Fei 2008-09-21 20:16|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com] 2008-09-21 20:16|| Front Page Top

#30 .5MT: But then again, many new posters might confuse you with someone who knows more about economics than just snarky sniping.

As I mentioned in the parallel thread, "It wasn't long after t-bills went negative in 1940 that the government had to introduce war bonds, because their budget was so stretched.

FY '09 is going to be a bloody nightmare for the feds, as tax revenues may be double digit less than they were for FY '08. The top 20% of income earners pay 80% of the federal income tax. They make most of their money through investments, and it has not been a good year for investments.

And 40% of all federal taxes are corporate taxes.

This means a huge budget deficit, if spending is anything like it was this year. And a huge budget deficit, plus huge bailout payments, means a butt load of t-bill offerings.

Right now, t-bills are one of the safest investments. But the more t-bills that are offered, the less safe they become. This is because the government does not pay yields via earnings, but by tax revenues.

In effect, issuing t-bills to pay off the yields of other t-bills. This next year, interest on the federal debt along may equal or exceed defense spending. It is already the fourth highest expenditure in the budget, after HHS, Social Security, and the Pentagon."

Posted by Anonymoose 2008-09-21 20:26|| 2008-09-21 20:26|| Front Page Top

#31 moose - don't underestimate the half.

Posted by Frank G">Frank G 2008-09-21 20:30|| 2008-09-21 20:30|| Front Page Top

#32 Treasury proposal keeps changing:
-- Now to buy "troubled assets" without specifying type
-- Treasury backup of money market funds limited to depositors as of 9/19 and excluding subsequent contributions (eliminating incentive to move bank deposits into MMF & also avoids competing with Treasury paper offerings)
-- firms with HQ's outside of US will now be eligible

Posted by Anguper Hupomosing9418 2008-09-21 22:39|| 2008-09-21 22:39|| Front Page Top

#33 I think it will take way beyond spring.

I use spring - March sometime - As when defaults begin to fall a little because March of 2006 was when the the rediculious loan madness began to tail off.

Posted by Mike N. 2008-09-21 22:48|| 2008-09-21 22:48|| Front Page Top

#34 Barry Ritholtz says that in 2004, the SEC gave special dispensation for the five brokerages

For those following along at home, here's the link:

How SEC Regulatory Exemptions Helped Lead to Collapse

Amazing. Apparently nothing was learned from LTCM in '98. Or they got cocky. Or both.

Posted by KBK 2008-09-21 23:46|| 2008-09-21 23:46|| Front Page Top

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