Power And Dollar

Don’t Get Too Excited About $700B Bailout

How consequential is this bailout plan?  For intra day trading activity, it matters.  For anything beyond ½ year time frame, it is doubtful.  

 

$700B is about 6% of total US mortgage market ($12T).  

 

Paulson’s announcement did stop the sinking of equity.  That gave everyone an opportunity to think a bit, save themselves from a panic sell off.  However, once this news wears out, will there be any supporting news?

 

Even if all sides agreed on a deal, how much does it take to make it operational?  What will happen to the market in the mean time?  Every sticker listed on the NYSE board freezes the price and wait for Paulson?

 

Paulson and Bernake have been talking about confidence all along, i.e. a Prozac.  Therefore, the core is about make belief – believe in your counter party being clean of toxic assets – and so you think you can lend money again.  

 

What about the reverse auction?  I suggest you to read half of the story here .

 

It works, if there will be buyers who want to compete against the government in buying toxic assets.  If not, kiss $700B good bye.

 

That article is half of the story.  The other half is that sellers have asymmetric information about the asset.  There is only one buyer.  Worse, this buyer is eager to buy using someone else money with no accountability.  Have you ever hired a merchandiser with no accountability?  If a seller cannot sell the asset to the government but someone else did, once there are transactions, the assets now have new prices to be modeled.  Thus, the mark to market rule helps the asset to be re-priced.  Thus, unloading the asset immediately is all too necessary for some of the sellers.  For that reason, a good portion of the banks are just waiting for others to sell.  

 

How successful can this plan be?  And the House Republicans are already placing traps for Pelosi already: their non-participation gives them the opportunity to fire at Democrats when this bailout plan fails (hold the Democrats accountable for bad decisions).

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September 26, 2008 - Posted by | banking, Barack Obama, Current Events, Democrats, election, Election 2008, John McCain, politics, Republican, wordpress-political-blogs

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