A Forex View From Afar

Wall of Shame The Bailout Plan

The bailout plan is the hottest topic around, let us examine some of the plan’s unique characteristics:

• The plan will require a blank check with $700 billion on it, minimum
• Although the plan is just steps away from being voted, no one can say for sure what it does or how it will be implemented
• The agency in charge of supervising the plan is still unknown.
• The plan presumes the toxic debt will be taken from banks’ balance sheets. It’s still not sure how it will be priced
• Toxic debt = packages of mortgage loans which are in a default phase. Most securities had been downgraded from investment grade to junk. This looks more like investors trying to scrap them, rather than the liquidity crisis that the Treasury claims.
• If the bad debt gets overpriced U.S. taxpayers will support the losses.
• If the bad debt is under-priced or priced at the current market value, it will not help the institutions who may as well offset it at fair value now. Banks can simply write down the bed debt and the same effect will emerge.
• The main reason behind the sub-prime crisis was the high default rates among homeowners and falling house prices. Injecting huge amount of cash into the financial system will not reduce mortgage rates, nor help interbank liquidity that impacts the taxpayer who is back-stopping the package. This looks like trying to cure the symptoms rather than the disease.
• Mr. Paulson is asking for full immunity when implementing the bailouts. To some, this says a lot, and to most it says it all. This smells.
• The plan has alternative names too: “The Swedish Solution”, “The Hanky Dumpty sat on the Wall (Street)”, “Bail-me-out Mae”
• The plan has no provision for financial officers of the failing business models to re-pay into the $700B any of the bonus checks issued since June 2007 downgrades of toxic debt, that is something maybe to consider. Check issued to “The U.S. Taxpayer” will start to cover things by all of those courageous enough to do the right thing and balance the investor’s book a little. The taxpayer foots the damage bill, as well as having their own investments stripped bare. The market’s job is to take the maximum amount of money from the maximum amount of people in the minimum amount of time. Well done on getting that done, but this really is turning into a Hall of Shame.

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