Whose Bail-out Is It?
Published on September 29, 2008
Published on September 29, 2008
Bailed out? I might be listening to the wrong people and hence I have similar opinion that the bail out plan, in the way it has been agreed to isn’t going to help much. It’s not an easy situation and must be pretty tough on economy guards. In stead of sharing my words, I shall share some quotes from key people on what do they think of this form of the bail-out. From John Hussman of Hussman Funds–
Does this transaction protect the institution against failure? No! If you buy the bad assets off the balance sheet at their market value, nothing changes on the liability side! You may have improved the “quality” of the balance sheet, but you’ve provided no additional capital. At best, you’ve allowed the bank to liquidate its assets more easily to meet continuing customer withdrawals in the vicious cycle described above. The only way that buying the questionable assets will increase capital on the liability side of the balance sheet is if the Treasury overpays for them.
And if you overpay them, you aren’t being smart business person. So that brings to me Warren Buffett’s much publicized investment in the Goldman Sachs. First pls understand this is an investment that is not in the Goldman Sachs the way we knew it till last month. This investment is in a Bank Holding Company which puts it under a different regulatory structure that gives it access to the Fed window. Goldman’s balance sheet still has tons of shareholder equity protecting the preferred. On top of it, a 10% dividend Yield is also what he has carved out. Shouldn’t the government go “Warren Buffett Way” as well?
Let’s move on to another bear, Nouriel Roubini, here is what he has to say (I don’t know how much you would agree with his remarks but he is surely one of the most read economists on Wall Street), his anger is loud and clear-
Thus, the Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown. It is pathetic that Congress did not consult any of the many professional economists that have presented – many on the RGE Monitor Finance blog forum – alternative plans that were more fair and efficient and less costly ways to resolve this crisis. This is again a case of privatizing the gains and socializing the losses; a bailout and socialism for the rich, the well-connected and Wall Street. And it is a scandal that even Congressional Democrats have fallen for this Treasury scam that does little to resolve the debt burden of millions of distressed home owners.
Personally I am unable to comprehend the benefits and sufficiency of this plan. We’ll see how best it serves the markets. I am being careful of the developments that are taking place. Asian markets performed pretty poorly, Europe doesn’t seem to offer any comfort and US stocks market futures, as of this writing, are clearing saying that “more pain is on the way”. The TED spread is screaming due to pain and maybe predicting pain ahead, if I interpret it the way it was before 1987 crisis.
We are nearly 92% in cash for OPNewsletter and our only income spread opened is a bearish butterfly.
Stay cautious, Stay profitable, this is your capital, protect it, OP