"Troubled Assets Recovery Program"...

motordavid · #1 09-22-2008, 11:57 AM

This is not car stuff, but what happens and how it happens, in
the next weeks, may impact you more than you realize, and that
impact could be well over a Trillion Bucks out front, with nearly
trillions more buried in the details or, lack of details...

No econ Xpert, but some musings and ref's from my hard reading
over the weekend; more info to come, as this unfolds, but the
Barbarians remain at the gate, imo.

-The 3 paragraph "stories" most of us read, or that appear as 15 sec.
talking head "news", would have us believe the less than rigorous
approach to mortgage lending to Joe&JaneSixPack, is the real problem.

-You thought AIG was your friendly insurance company with a world
wide reach? The worldwide reach was Credit Default Swaps. AIG had
written nearly half a Trillion Dollars worth of "credit insurance"...

-What's a CDS you ask?
"Credit-default swaps are a way of transferring the risk of owning a bond. If I own a bond issued by General Motors, and have also purchased a credit default swap on G.M., then I am covered if G.M. defaults. I can recover my losses on the bond from the institution that sold the swap to me.
There are now many more credit-default swaps outstanding than there are bonds for them to cover. They became a way to gamble with almost no money down. For a small fee, my hedge fund can bet that a company will go under. And your hedge fund can collect that fee, and produce instant profits. Years down the road, you may have to pay, but big companies rarely default anyway, so the risk is minimal. Or so people thought."

Sounds like a good deal...except like most dreamed up "instruments", it
got a lil' out of hand:

"One way to think of the swaps market is as insurance that is issued by companies that do not have to keep reserves and may be totally unregulated. I can’t legally buy fire insurance on your house, since I have no stake in it, and letting me have insurance would give me an incentive to burn it down. But I can buy a credit-default swap on G.M. even if a G.M. default would not cost me a penny."

-Why "it" & AIG got so messy:

"That brings up “counterparty risk.” If my hedge fund bought a G.M. swap from A.I.G., and sold one to your hedge fund, then my fund has laid off the risk. If G.M. defaults, I will have the money to pay you as soon as A.I.G. pays me.
But if A.I.G. has taken lots of those positions — and it did — then who knows which banks and funds and investors will be in trouble if A.I.G. cannot honor its obligations? My fund may have a perfectly matched book, but it is suddenly in deep trouble if a counterparty is defaulting. Since no one keeps track of all the moving parts, no one knows just who may get into trouble if one participant fails."

(The three very enlightening paragraphs from Floyd Norris.)

-So, AIG had/has to get bailed for nearly a 100 Billion Dollars...

-Back at the Liquidty Crisis Ranch:

Credit Default Swaps are estimated to be currently a ~ $62 Trillion Dollar Market.

Remember dear readers, this is a totally unregulated financial "product"
as is the selling/trading/application of the "product". None of this
greasyazz "mkt" is really being addressed by the RescuePlanGang...
And, one wonders where the rest of that 61 1/2 Trillion Dollars of CDSs
are buried and in what institutions? Maybe some of that crap is in your
bank, your mutual fund, your insurance company, and your pension fund,
disguised as a suspect asset. Damn...

Next Item:
The lobbyists for the "financial institutions" that would oversee, unwind, assess and "correct"
the bad debt/bad mortgage/lack of liquidity problems and,
stand to make some serious azz money in fees from their "work" over
the next few decades, are lined up in Capitol Hill this morning.

Same goes for the dear lobbyists trying to get the company(s) they
represent added to the master list of what companies and what parts
of those companies, investment-wise, get "protected".

The Dems&Reps:

Both sides of our genius legislature is editing from afar, sneaking in
language they want, arm wrestling with the other side, and being
pressured to come up with thousands of pages of "law" in less than
a week's time. Much of the salient points in this Plan would be backed
by "law" that cannot be reviewed, diseccted, overturned, undone, etc.
Shame on them, and us. Neither side could agree on where to go for
lunch...

Paulson: smart guy, but the same guy that said two weeks ago that
the financial underpinnings and system remain strong and effective...
musta been a very changeable two weeks. And, he's back to the Street
in January, licking his chops for some of the Plan Overseeing Dough.

Smart guy, but a lame duck that is gonzo in 3 months...

Banks:
very complex issue and even with a couple of years of tough senior level Money&Banking courses,
I have trouble understanding all the nuances.
But, the banks that resisted, avoided or carefully controlled their exposure to CDSs,
bad loans, poor set asides and the like, stand to gain just about squat from this BailOut.
Must be fun being a "better bank", only to see your crummy competitor get a big
helping hand and seriousazz book clearing of debt and "distressed assests" and responsiblity.

Those "Troubled Assests" that will get "Relief"...
Do they all get valued at Book? At 50 cts on the dollar? At 30 Cts on
the dollar? Do some get reviewed and valued differently than other
junk? Who decides and why?

Do you think even the top econ's and asleep at the wheel regulators
will get any beforehand transparency on this enormous intertwined
bundle of "troubled assets"? I wouldn't bet on it.

I'll pause in my ranting and review...not trying to preach, but this is
an enormous undertaking and without precedent in the econ history
of the US or, world.

Just wanted to bring up some topics and particulars that will tend
to get swept under the rug in the coming days and weeks.
Thanks for your patient read..

BR,mD

My apology for the crummy indents, paragraphing "look" and
poor kerning...the Edit button is not allowing me to clean up
the look of my rambling post,