Well, the fun just never stops, does it? I’m as surprised as the market seems to be that the $700 billion proposed banking “bailout” didn’t pass the House of Representatives. (Gotta thank Barry Ritholtz for pointing out the most succinct news headline on this story, from Marketwatch: “House to Wall Street: Drop Dead”.) Pretty eye-opening to see who the naysayers were: 2-to-1 Republicans, with a healthy mix of Dems thrown in. I’ve been keeping my head down during these active markets and so haven’t had time to dig into the so-called bailout’s specifics -- especially as it seemed almost destined to pass. But this surprise outcome got me curious as to what’s really in the secret sauce – and why so few Representatives can hold their noses long enough to swallow it. Here are a few interesting reads I took in with today’s morning coffee:
The New York Times’ “Treasury and the Fed Looking at Options” outlines the big picture of how much money the Fed and Treasury have already committed to interim bailout-esque maneuvers, and how much more is available to them. In other words, if you’re wondering how big $700 billion really is, this’ll give you a better handle on that. Probably the most interesting factoid is this: in August 2007 the Fed had $800 billion in free reserves to play with; now they’re down to $300 billion before they have to start printing money to expand the money supply.
Some really eye-opening reads on Seeking Alpha. Ronald Pires points out a little-noticed headline from the Financial Times that might presage another hidden crisis: “The Fed also suspended rules that prohibit banks from using deposits to fund their investment banking subsidiaries." Pires credibly contends that banks are hungry for cash so that they can fund their spending spree of buying out smaller banks. Trouble is, with this deposits restriction lifted, they could be using FDIC-insured deposits – yes, your grandma’s checking account – to fund all that M&A action. Now that’s a jolting thought.
Meanwhile, in “Why This Bailout Can’t Work – and What Will” Julian van Erlach lays out some fairly specific economic analysis decrying the rejected package and recommending other moves. Here’s a guy who can seriously wield a calculator, so if you’re craving a more quantified analysis, check this out.
Mark McQueen advises you to ignore the bailout vote as pre-election politicking. He paints a believable, if not very flattering, picture of how McCain and Obama used this vote as a way of laying clear blame on the current administration’s doorstep for this mess. McQueen suspects that an amended but probably not wholly rewritten version of the bill will pass later in the week, after the news headlines have subsided and Bush has gotten his public dressing down. Interesting stuff, to say the least.
My two cents on the subject: I haven’t sat down and read all 110 pages of the package document, but I do wonder if its failure to pass doesn’t boil down to simple semantics. I don’t see this as a “bailout” so much as a trade. It’s an investment vehicle for several transactions that will quite possibly wind up being profitable for the Treasury, and thus for taxpayers by proxy. The ultimate return on that investment is unknown at this point, but it will almost certainly return something. Think of it this way: every single mortgage purchased with this money would have to default to a value of zero for the package to have an actual net cost of $700 billion. Now, we’ve seen a lot of scary firsts in the past few weeks, but that one seems unlikely-to-near-impossible, in my view. I’m not sure House representatives have really grasped this themselves – or if they could explain it to their constituents.
What are YOU reading about this situation that’s helping you see the big picture more clearly? Is a “bailout” necessary, or can the market itself correct things, in your view?
[image: Flooded rowing boat by Chris Gornell on flickr]
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