Bargain Prices? describes the planned $700 billion bailout as follows:

The plan would allow the Treasury to buy up troubled assets from U.S.-based companies and foreign firms with big U.S. operations. The aim is for the government to buy the securities at a discount, hold onto them, and then sell them for a profit.

Here’s the question: if these troubled assets are so cheap, why doesn’t anyone else besides the U.S. government want to buy them?

There are plenty of hedge funds out there with ample cash. Perhaps, if the assets are such a good deal, some European governments will want to get in on the bargain also, rather than let the U.S. Treasury get all the spoils.


The Government is not going to buy them at a discount, Steven. Quoting Ben Bernanke:

"I believe that under the Treasury program, auctions and other mechanisms could be devised that will give the market good information on what the hold-to-maturity price is for a large class of mortgage-related assets. If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits."

This bailout is intended to avoid MARKET prices, and instead to purchase at MATURITY prices, i.e. par value. This is a sham, Steven!

Bobby G

@23 - Hunter

Ah, and we have arrived at the mortal weakness of American Capitalism: perfection and optimum is not only missing from virtually all aspects of our economy, it is also practically impossible.

Take universal health care for example. We economists (those who have studied it) can probably come up with a great system of universal health care for our country. The problem? Transitioning to that system would *destroy* our economy. We are simply too set up in our current, imperfect ways to ever have the ideal solution. We may come up with ways to move to a -more- optimal, -more- efficient system, but to make the jump to the truly efficient system is a move that the economy would not survive.

The same applies here, I think. Yes this market is imperfect; in fact, it has many flaws. It can certainly be improved, and it is most definitely in trouble today. However, the consequences of letting the market fail, if that's what true laissez-faire economics would dictate, would probably cause our economy as a whole to fail due to unquantifiable things like a complete deterioration of investor confidence, both foreign and domestic. Not to mention it is a political impossibility considering how invested our government is in its own survival, something based heavily on the preservation of the economy and, by proxy, this important part of the economy.

As I've said, the fact that perfection is, at least right now, an impossibility is a somewhat morbid reality. Many solutions that a brilliant economist might think up might not actually be possible for our country, due to the fact that the world places inefficient values on many resources. The US economy is not perfect, and probably it never will be, but we have to make the best of it with what we've got.



This is why it's so important to have an equity stake in the transaction. If you have a willing buyer and a gullible seller, how do you ever determine the value of anything. Why should anybody in the private sector trust a price that was determined in this way? Both parties have to have an equal stake in the transaction, and so financial institutions participating in the loan purchase plan have to offer up something in return should the paper prove worthless.


#18 - Bobby G

This market was artificially created and imperfectly administered. It deserved to die and it should. Left alone, a new market - one based on unwinding and de-mystifying these securities - would have emerged. Now we are just adding another layer of information that must be decoded in order for a trader to properly price the asset - namely, your "price floor."

What's the use of adding more and more data who's sole purpose is to obscure the true value of the underlying asset? The answer, unfortunately, is that a value judgment has been made: that transactions costs are more economically valuable than efficiently allocating capital.

Good Night, Adam-Smith-style capitalism, we will miss you.


This reminds me of the time that the Iraq War paid for itself from Iraqi oil money. That was awesome!


#12 - Mitch

At the risk of sounding snippy at someone who is willing to play the devil's advocate, you make one of the same assumptions that got us into this mess. The GSEs had low borrowing costs and *could have* settled for low rates of return. Then investors and managers got greedy. And then investors lost confidence in the model. And then borrowing cost skyrocketed.

Now what happens to confidence in the US Government when we tell the world that we *intend* to lose money (or gain next to nothing) on this transaction? Do you think that investor reaction around the world will be any different?

We're just moving piles of risk around and calling it progress. Each transaction adds a layer of obfuscation that will prevent any true unwinding or de-levering.


The return of the value investor is nigh!

Joe D

Jeffrey @10:

I believe it's a discount to the *face* value, not the *market* value (which does not currently exist: if *nobody's* buying, there's *no* market, so no market value).


The problem is if they buy the assets on the cheap then the companies don't really benefit and the plan spends a lot of money without doing anything. On the other hand if they buy the assets for too much money they are taking our money and giving it to the people who already benefited from the run-up.

In reality I think this is what Bernanke called the helicopter drop solution to the liquidity trap...

Bobby G

The reason no one else wants to buy them up is because the profit potential only exists if the market recovers. The market has a much greater chance of recovery if something like this price floor occurs, so that the market can stabilize and reorient itself and get more exchange (right now the real estate market, for example, is so stagnant in many major areas). Finally, a price floor can only be placed and held enough to be truly taken seriously by someone with enough money (say, $700b) to back it up. Not to mention the crippling risk that most private firms would face in the worst case scenario: failure to stabilize the market. The US govt needs to take that risk... private firms and hedge funds might be less inclined to do so.

What would not be surprising to see now, however, if this proposed bailout goes through, is a large increase in private investment. If the government sets that price floor, other investors can come in now and do exactly what the proposal would do, capitalizing on the established price floor stabilization. I wouldn't be surprise if the US government doesn't use up all of that bailout money. In fact, that might have even been the intention. Investor confidence has undisputable importance, after all.



how 'bout we buy national health insurance for that money instead? We can buy 6 of Hillary's health care plans, and then when the economy tanks we can all go see a team of shrinks about our inventments


I couldn't agree more - one of the key issues underpinning this crisis is people forgetting that risk/reward go hand in hand. Selling this bailout plan as essentially "guaranteed" return for the government seems to be very quickly forgetting the sins of the past.


Come now! This is the Bush administration. What they say is just for public consumption, to justify doing what they feel like.

It's wrong to tax those that have the most, it's wrong to regulate companies to stop them from foolhardy steps (like giving loans to anyone who asks for one, no proof of ability to pay required), and it's right to reimburse them for their losses (but let them keep the bonuses and golden parachutes).


@ #6 - well spotted.

Either CNN has it wrong, Paulson has it wrong, or every economist I've read over the last couple days has it wrong. Assets would have to be sold at higher than market prices.




At the risk of defending what is sure to be a boondoggle, the answer lies in borrowing costs and rates of return. The government can pay higher prices because it can borrow more cheaply and requires a lower rate of return than a distressed asset hedge fund. The banks are unwilling to sell because they believe the hold-to-maturity value is significantly above current market prices. However, this requires them to mark their positions to market and impairs their balance sheet. A higher bid from the Treasury would allow banks to either offload their assets to delever or stop the vicious cycle of selling assets to raise capital, those sales putting pressure on the illiquid market prices of other assets and thus requiring more write-downs.


because as usual, there is more to it than we can know. these very questions should trigger a deeper look... (saw article headline that read: AIG bigger than Enron--)


I thought China was buying it all...


There are :


I think you may be the last person on earth to come to this realization. Perhaps you should sit out the current events stuff.