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John Hussman Has a Better Plan
Old 10-04-2008, 01:54 AM   #1
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John Hussman Has a Better Plan

Hussman Funds - Weekly Market Comment - You Can't Rescue the Financial System If You Can't Read a Balance Sheet - September 29, 2008
Hussman says Paulson plan can't work because it th eonly way it can increse bank capital is to overpay for the loans it buys. This seems to me to follow from the simple algebra of a balance sheet.

Hussman says Buffett's structure for his Goldman Deal is what the government should have done for the bamks it wants to liquify.

Ha
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Old 10-04-2008, 05:58 AM   #2
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I agree with the concept that the Paulson plan involves "overpaying" for the assets. Currently, the market for any mortgage backed security is distressed even if it is 100% performing. I've heard that performing "normal" mortgages are selling for 45 to 65 cents on the dollar. Subprime, even if performing, is under 35 cents. The plan is to buy some of these which creates the value nearer to $1 which can than be used to reflate assets.

The problem I see now is that fear and panic has taken over. If magically all mortgage loans went back to par, banks and other investors will still be reluctant to loan money to anyone. Even California couldn't get bids for a bond.

Supposedly, there were $1.2 trillion of subprime loans. About half are expected to default. In the grand scheme of things, this should have been a bump in the road for our financial industry. It shouldn't have required any federal funds. If something was done, it would seem that a federal "bailout" of defaulted loans would only be $600 billion.

Since all loans are now suspect, I have no idea if buying a few mortgage backed bonds will make that much of a difference. Mark to market has been "adjusted" so a lot of the distressed paper can be revalued without government intervention.
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Old 10-04-2008, 07:50 AM   #3
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Hussman's weekly commentary is a good read and his fund is one of the few things in my portfolio that helps me sleep.
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Old 10-04-2008, 07:54 AM   #4
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Paulson talked to Buffett during the process so you would think they discussed this. End the end, Buffett supported the plan. Wouldn't you love to have been a fly on the wall during their discussion.

Below is a link to Fidelity Investment's analysis of the bill and how it can or will work. Not an endorsement for it, just an analysis.

http://personal.fidelity.com/misc/fr...id=20084343p01
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Old 10-04-2008, 12:45 PM   #5
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Lets see you own lots of RE, so you hire a Manager, give him or her 100 days to "fix the problem", at the end of the 100 days the employment WILL terminate, and you have find "someone else". Oh yes, you give them $700,000,000,000 to work with during those 100 days. Do you really expect the "problem will be fixed"?
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Old 10-04-2008, 08:07 PM   #6
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Quote:
Originally Posted by haha View Post
Hussman says Paulson plan can't work because the only way it can increase bank capital is to overpay for the loans it buys. This seems to me to follow from the simple algebra of a balance sheet.
This is not necessarily true. A bank's capital ratio is the percentage of its capital to its risk weighted assets. If a bank sells a risky asset for cash at book value its capital ratio improves. Also once it's balance sheet is cleansed of toxic assets, uncertainty is greatly diminished and private capital should return.

Hussman's alternative is known in finance as a "cram down". That is, existing investors get crammed into a more subordinate (read worse) part of the capital structure. That is almost universally viewed negatively by investors. Considering that the Government wants private capital to invest in financial institutions, Paulson likely decided that threatening to cram down current or future investors was probably counterproductive.
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Old 10-04-2008, 08:30 PM   #7
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Yrs to go is right and Hussman example is wrong. If you have marked a sub prime security down to say $.30 on the dollar, the risk that it is worth less than .30 is considerable. The Tier 1 assets of bank is a function of the riskiness of the assets. (In general banks needs a tier 1 ratio of 6% (implying a leverage of ~16) although most banks like to see the number in the 8+%)

If a bank sells an asset to the treasury for .30 its tier 1 ratio will improve because cash has no risk associated with it. This will free up the bank to make more loans. It may even be the case that Tier 1 ratio improves even if the Treasury only pay .25 for the asset.

Haussman's example has several flaws starting this fact a bank with the balance sheet he proposed would have already been taken over by the FDIC.
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Old 10-13-2008, 08:55 AM   #8
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When my "perma-bear" manager starts to like things, I feel a little better:

Hussman Funds - Weekly Market Comment: Four Magic Words - "We Are Providing Capital" - October 13, 2008
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Old 10-13-2008, 09:00 AM   #9
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Originally Posted by huskerblue View Post
When my "perma-bear" manager starts to like things, I feel a little better:

Hussman Funds - Weekly Market Comment: Four Magic Words - "We Are Providing Capital" - October 13, 2008
Great read. Thanks.
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