Sep 20 2008
What’s 700 Billion Dollars Between Friends?
700 Billion Dollars.
That’s what the Prez is asking for from congress to buy up all those bad debts. I suspect that come this week, congress will give the Prez his 700 Billion and essentially a blank check for future requests (very similar to Iraq) as this financial crisis continues to spiral from bad to worse. The problem is no one is sure that this plan will work. From CNN:
The problem is that the bailout will not automatically make banks profitable, nor will it stop the slide in home values that is wreaking havoc on the economy.
And see therein lies my problem with the whole shindig. Someone (okay several someones) tried to convince me that this bailout was necessary. The first “you don’t get it” was presented along these lines:
In addition, it’s a loan that was given as a “bailout”, AIG has assets of billions in properties, and investments. The reason they needed the bailout was due to their assets not being liquid enough to pay debt. Once liquefied, the loan should be able to be re-paid.
Additionally, if they US Government owns part of this company, the US then stands to make money off of AIG’s foreign clients. Picture that.. the US making money off of Europe’s economy
The other, along these lines:
What youre missing is that this is a unique “bailout.” The government is simply buying illiquid assets for pennies on the dollar. In fact, the essentially turns the government into a huge hedge fund. After these transactions are unwound, the US government will have made a profit. Check the news! AIG shareholders are suing to halt the transaction. Why? Because the government is buying 80% of the company for pennies on the dollar on a fully-diluted basis. At the end of the day, the government will be up on these transactions! I trade all day on my own account. I follow these things VERY closely! Banks are not “failing” in the traditional sense. The rating agency downgrades cause capital calls. Given there is no liquidity, banks cannot use their “good” but illiquid assets to raise cash. Therein lies the problem. All the gov’t has done is take those assets from banks for pennies on the dollar and give them cash to operate.
The problem with both of these scenarios is that it fails to take in to account two very basic issues with this bailout and the financial crisis in general, one of which the quote form CNN pointed out:
- The bailout will not stop the slide of home prices which is wrecking the economy.
- We’re still a “consumer” economy where people can no longer afford to consume. ]With consumption making up 70% of our GDP and home prices falling, no one can afford to buy anything…hence a contrition of the the economy…and a recession/depression.
Some other point to think about:
- Where is this 700 billion dollars coming from? Anyone know? I don’t.
- How will our “investors” (i.e. China, Dubai, etc.) feel about using their money (some of it will be their money) in this risky bailout plan…that had no guarnatee of success?
- Don’t we still have wars to fund? How does this 700 billion dollars affect that?
- What if 700 billion is not enough? Then what? Are we really going to write a blank check to buy up debt as it fails?
- Do homeowners get a piece of this pie or ust the suits on Wall Street? If the answer is no to homeowners then this bailout isn’t worth the paper it’s being printed on.
I hope in the coming weeks someone has some answers to these questions and more because I see us throwing good money after bad, destroying the dollar and hastening the Great Depression the Sequel upon all of our doorsteps.
