“The millionaires in the US Senate, apparently moved by the prospect of having to actually live on their salary rather than their substantial investments, passed by a 75-24 vote a sweeter version of the Troubled Asset Relief Program(TARP) than the one that failed in the US House of Representatives on Monday. . . .
The House is scheduled to once again vote on the proposal on Friday; perhaps enough previously recalcitrant arms have been twisted, bent, fractured and, if that doesn’t work, ripped straight off the shoulders to obtain a passage vote there, as well. . . .
The problem here is that, in a financial crisis that has at its heart a loss of confidence in the financial system, why would you want to even further drain confidence by putting in question the actual truthfulness of bank balance sheets? Michael Rapoport of Dow Jones Newswires makes an intriguing point: Wachovia Bank, just bought out by Citicorp for $2 billion, had on its last day on its ledgers assets with a book value of $75 billion. Maybe its not that asset values are too low – maybe the entire crisis is the markets telling us that they’re too high. . . .
If the question is whether or not to buy something, like the $700 billion in mortgage securities to be bought in the plan, shouldn’t the question of how much you’re going to pay for it be a major consideration? All children in the capitalist world quickly learn the tradeoff between price and quantity. . . . It’s the same thing with mortgage-backed securities. The $700 billion can be spent to buy lots and lots of them very cheaply, or much fewer of them priced higher. Whichever option is chosen will critically determine whether we’ll soon be able to see the breaking of the dawn out of the current darkness.
Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke have been playing this issue pretty close to the vest, but through leaks and the likes it looks like they’re going to be buying high, paying as close to par value on the securities as feasible. If this really is the implementation strategy for the buyout, one wonders just how much Dr Bernanke and Secretary Paulson really understand what’s on. . . .
Will paying higher prices for MBS accomplish that? It will, at least temporarily for whoever is lucky enough to get a piece of the government action. But for the system as a whole, the benefits are a lot more questionable. . . .
Essentially ignored in all this is the probable trillions upon trillions of leveraged structured finance derivative securities whose value depends on the original securities. Nobody really knows how much of these there are; one estimate put the number at around $25 trillion. You can’t solve a $25 trillion problem with $700 billion. It’s no wonder that Warren Buffet once called derivatives ‘financial weapons of mass destruction’.” (Read more from Asia Times Online)
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