Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Upsides of the bailout for FIREes
Old 09-21-2008, 02:15 PM   #1
Thinks s/he gets paid by the post
free4now's Avatar
 
Join Date: Dec 2005
Posts: 1,225
Upsides of the bailout for FIREes

There's plenty of bad news to go around, so I am starting a thread for the good news on this bailout.

I see several ways that this bailout situation is better for FIREd people like myself than for other people:

  • Since I have a big portfolio and relatively small taxes, I'm much more exposed to the stock market than taxes. Lets say the bailout ends up being net 1 trillion dollars spent. That is about 2% of the US stock market capitalization, which is approx 50 trillion. So if the Guv pumps that much into the stock market it will necessarily increase the overall market by at least 2%, and of course the intention is that it will stave off a much greater decline. Two percent of a million dollar portfolio is $20k. Whether it's 2% or 10% or 50% that my portfolio is up from the bailout, it's a good thing for me. Now to calculate my tax liability... Lets assume that my income taxes are the same as that of the average US citizen, to make the calculations easy. 1 trillion divided by the US population of 300 million is approximately $3k, the present value of my share of the tax burden. Since I'm getting $20k or more in portfolio increase, at a cost of only $3k in taxes, this bailout is a very good thing for me, no matter whether it's successful or not. Of course people like ourselves with big portfolios and low taxes are rare, and most of the US population will end up worse off, but hey, I've got mine
  • Just like 9/11 changed our country's approach to security, this bailout will change the country's approach to financial transparency and market regulation. In the end the markets will be more transparent and so should tend to track intrinsic value straighter and with less volatility, which helps us folks who are living off our portfolios.
  • With the hangover of this credit crisis, and the new regulations adding friction, credit is likely to be scarce for a long time. This means that our big portfolios of freely investable funds will be relatively more valuable to others.
__________________

__________________
free4now is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 09-21-2008, 02:45 PM   #2
Thinks s/he gets paid by the post
2B's Avatar
 
Join Date: Mar 2006
Location: Houston
Posts: 4,330
I tend to think this is the greatest government confiscation of property in the history of the world. The number of non-performing mortgages is small relative to the number of performing mortgages. The current squeeze is a combination of unknown credit factors inside companies that were repeatedly attacked by naked short sellers. As their prices fell the rating agencies dutifully assumed that the rumors must be true and the downgraded the companies. The naked shorts attacked again triggering clauses that required infusions of capital or the company defaults on massive amounts of debt that would bankrupt them. Once they got the first bankruptcy, they were off to the races again because the panic selling forced the mark to market rule of the liquidating performing assets valued at junk prices. This weakened the otherwise solid companies and the cycle continues. As long as mark to market and naked shorting continued the entire financial system was going to collapse.

Now the government stands ready to take these otherwise performing assets off a company's hands at a bargain price. The naked shorts are turned off (hopefully) and the government has no need to mark to market. They can keep receiving your mortgage payment for as long as it takes to recover the original principle. They make big profits on most of the paper they will take over. They certainly won't take over non-performing paper for more than the true net asset value of the underlying collateral. Even here, they won't need to take on much.

Eventually, sanity will be restored and maybe the government will not continue to be in the private equity business for very long. Now if only our congress can keep from trying to make this a grand experiment in social engineering......

The fools that bought all sorts of bad CDOs won't be so lucky. Much of the worst paper was marketed to individual investors. That stuff is non-performing. The government has no intention of bailing out individual investors that bought bad paper. Too bad if you did.
__________________

__________________
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius
2B is offline   Reply With Quote
Old 09-21-2008, 06:29 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
clifp's Avatar
 
Join Date: Oct 2006
Posts: 7,450
Excellent analysis Free4Now. I think anybody with a $1 million or more of liquid assets, while not exactly a Wall St Fat cat is at least a well fed cat.

The dropping of millions of tons of cheese into the system is going to keep a bunch of rats which should have starved healthy. So even if we don't eat any of the cheese, we still benefit by a having plumper rats to catch
__________________
clifp is offline   Reply With Quote
Old 09-21-2008, 07:05 PM   #4
Thinks s/he gets paid by the post
Finance Dave's Avatar
 
Join Date: Mar 2007
Posts: 1,046
"So if the Guv pumps that much into the stock market it will necessarily increase the overall market by at least 2%"

that's an assumption I'm not willing to make. If investor confidence falls, the market could go down further. Kind of irrational exuberance in reverse.
__________________
Finance Dave is offline   Reply With Quote
Old 09-21-2008, 07:40 PM   #5
Dryer sheet aficionado
 
Join Date: Feb 2008
Posts: 36
This analysis is simplistic and wrong. The Guv is not pumping any money into the equity markets. It's borrowing at a minimum $700 billion dollars to buy bad assets from a few financial institutions. There's not guarantee that what the government buys will go up in price as the housing decline continues and there's no end in sight. Second, if the Guv is really helping those financial institutions it will have to do it by buying at a premium price so there's even less chance of the Guv making any money on the bailout.

The borrowed money will have to be paid out with interest to those who lend, probably China, Japan and certain countries in the Middle East. The US Taxpayer, no matter what tax rate they are in, will have to pay for this, so higher taxes are unavoidable, and that tax increase can be substantial. This will drive the value of the dollar lower and high inflation will follow.

Any gains in the stock markets (which are quite speculative in this environment) will be more than offset by the declining dollar and the higher inflation. The more China and Japan and the ME lends us, the more vulnerable we are to the political whims of those countries. China in particular wants the US to ease restrictions on their Guv buying US assets like companies, industries, infrastructure, etc. If that is not happening, China will get ready to eventually dump their massive dollar holdings.

The US Taxpayer loses, making this potentially the biggest transfer of wealth in a single event from the US Taxpayer to the few financial institutions that may benefit.
__________________
nepo is offline   Reply With Quote
Old 09-21-2008, 07:59 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,615
Hey, this is supposed to be a happy thread!

Happy: I agree that interest rates are almost surely going to rise, and that could help those of us with liquid assets who want to put it into bonds/CDs, etc. It's not just the Chinese who stand to benefit.

Not Happy: Unfortunately, inflation is also likely to increase. And, it's no good getting 6% on your bonds if inflation is 7%.

Not Happy: I'm not sure I agree with the assumption that the average ER or R will have low taxes. The people who are producing earned income will not singlehandedly shoulder the tremendous tax burden that is coming (a burden caused by our military expenditures, by this current huge bailout, by our unfunded Medicare and SS liabilities, and by the many promised new social programs that some politicians and the electorate seem to want). We're surely going to see increased taxes on cap gains, and we'll probably see means testing of SS. I would not be surprised to see a wealth tax (a more direct one than the Cap Gains tax is) and a higher tax rate on interest thanon earned income. We are the rich and we will be soaked.
__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is online now   Reply With Quote
Old 09-21-2008, 08:20 PM   #7
Thinks s/he gets paid by the post
free4now's Avatar
 
Join Date: Dec 2005
Posts: 1,225
Quote:
Originally Posted by nepo View Post
This analysis is simplistic and wrong. The Guv is not pumping any money into the equity markets.
It is certainly a simplistic analysis and the numbers are debatable, but the point I think holds no matter what the numbers are: The bigger your equity position and the lower your taxes, the better a bailout is for you. And conversely people with low equity positions and normal to high taxes will be worse off.

Quote:
Originally Posted by nepo View Post
The borrowed money will have to be paid out with interest to those who lend, probably China, Japan and certain countries in the Middle East.
Good point. If we spend most of it in foreign markets then my argument falls to pieces. I am guessing in the end most of the spending will be in the US, just because it's less politically dangerous for Paulson and our government. I don't think we have enough time to do anything but the most expedient thing, which is spending most of it in the USA, even though spending overseas would make sense given that this is a global problem.
__________________
free4now is offline   Reply With Quote
Old 09-22-2008, 07:24 AM   #8
Full time employment: Posting here.
 
Join Date: Oct 2002
Posts: 717
Quote:
Originally Posted by samclem View Post
...Not Happy: Unfortunately, inflation is also likely to increase. And, it's no good getting 6% on your bonds if inflation is 7%...
While this may be "not happy", it may be an astute investment in the current environment.
__________________
Random Reinforcement is Highly Addictive.
riskadverse is offline   Reply With Quote
Old 09-22-2008, 08:07 AM   #9
Full time employment: Posting here.
 
Join Date: Nov 2005
Posts: 829
Inflation is the #1 threat to my future financial well-being. I'm not certain that a vast new welfare program for Wall Street is necessarily inflationary. There are many factors to consider, and inflation is partly a psychological as well as a financial issue, which makes it even trickier to analyze. I'd like to have a better grip on this issue.
__________________
socca is offline   Reply With Quote
Old 09-22-2008, 08:29 PM   #10
Thinks s/he gets paid by the post
free4now's Avatar
 
Join Date: Dec 2005
Posts: 1,225
If the Fed really pulls this off right, they will have done exactly what Warren Buffet does, buying distressed assets at a discount because he's the only one with the liquidity and speed to get such a deal done. Maybe Paulson is the secret successor to Buffet?
__________________
free4now is offline   Reply With Quote
Old 09-22-2008, 11:13 PM   #11
Thinks s/he gets paid by the post
 
Join Date: Jul 2004
Posts: 1,072
samclem - I agree with you on your analysis regarding the increase in taxation against all types of assets - interest bearing, dividend bearing , property owning and earned....also, means testing for any government 'subsidy' to one's income. And lest anyone say we should have a consumption tax...we do - it's called sales tax.
__________________
Deserat aka Bridget
We sleep soundly in our beds because rough men stand ready in the night to visit violence on those who would do us harm. - George Orwell/Winston Churchill
deserat is offline   Reply With Quote
Old 09-23-2008, 09:22 PM   #12
Full time employment: Posting here.
 
Join Date: Nov 2005
Posts: 829
Quote:
Originally Posted by free4now View Post
...buying distressed assets at a discount...
That's what the administration would like us to believe, and it's a seductive mental model. Unfortunately, it's wrong. We won't be buying assets, we'll be buying risk. Do you think that Paulson will be out on the weekends cutting the grass around the newly foreclosed homes the Federal gov't will now own and try to sell?

The risks that we will be buying will be of two types:
1) the risk associated with the security is unknown due to the complexity of the instrument; or
2) the risk is known, and it's not a risk that any prudent investor would ever want to take. That's where you and I come in - we have deep pockets and profound stupidity.

If this bailout goes through in anything like its originally proposed form, we may as well change the name of this great nation to G.S.A. : Goldman Sachs of America.
__________________
socca is offline   Reply With Quote
Old 09-23-2008, 11:02 PM   #13
Recycles dryer sheets
 
Join Date: Apr 2007
Posts: 292
If 9/11 changed our security outlook, how about putting the people who caused the problems in g'tmo for a while?
__________________
joesxm3 is offline   Reply With Quote
Old 09-23-2008, 11:35 PM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
It'd be a lot cheaper and more efficient to just put a uniform on them and stick them on a C-5 headed east.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Old 09-24-2008, 09:07 AM   #15
Full time employment: Posting here.
 
Join Date: Nov 2005
Posts: 829
Quote:
Originally Posted by socca View Post
The risks that we will be buying will be of two types:
1) the risk associated with the security is unknown due to the complexity of the instrument; or
2) the risk is known, and it's not a risk that any prudent investor would ever want to take. That's where you and I come in - we have deep pockets and profound stupidity.
Here's is Bill Gross's counter-argument to my argument:

washingtonpost.com

There are a couple of things missing from Bill's article:
+ if these securities are such a great deal, then why do we taxpayers need to step in and buy them? There is plenty of capital sitting on the sidelines waiting for a good investment opportunity, as Buffett's investment in Goldman Sachs illustrates.
+ the last 5 years have seen an unprecedented war-profiteering feeding frenzy among Iraq war contractors. There will be a similar feeding frenzy among bad-debt profiteering financial services contractors if the bailout is approved. When Bill mentions companies capable of helping the government evaluate bad debt, he's thinking first and foremost of his own company - PIMCO. PIMCO stands to make a fortune as a bad-debt disposal contractor. Bill really should have disclosed this conflict of interest as he promotes passage of a Wall Street bailout ASAP.
__________________
socca is offline   Reply With Quote
Old 09-24-2008, 09:24 AM   #16
Recycles dryer sheets
 
Join Date: Feb 2008
Location: Tucson
Posts: 118
I'm unable to muster any predictions of likely outcomes from the bailout. Events of recent months are truly cataclysmic. All bets are off. One thing I can be sure of is that many of the consequences of our government's intervention will be unintended. Peril or profit from this point onwards? Beats me.

Tom
__________________
tomintucson is offline   Reply With Quote
Old 09-24-2008, 09:34 AM   #17
Thinks s/he gets paid by the post
2B's Avatar
 
Join Date: Mar 2006
Location: Houston
Posts: 4,330
Quote:
Originally Posted by socca View Post
Here's is Bill Gross's counter-argument to my argument:

washingtonpost.com

There are a couple of things missing from Bill's article:
+ if these securities are such a great deal, then why do we taxpayers need to step in and buy them? There is plenty of capital sitting on the sidelines waiting for a good investment opportunity, as Buffett's investment in Goldman Sachs illustrates.
+ the last 5 years have seen an unprecedented war-profiteering feeding frenzy among Iraq war contractors. There will be a similar feeding frenzy among bad-debt profiteering financial services contractors if the bailout is approved. When Bill mentions companies capable of helping the government evaluate bad debt, he's thinking first and foremost of his own company - PIMCO. PIMCO stands to make a fortune as a bad-debt disposal contractor. Bill really should have disclosed this conflict of interest as he promotes passage of a Wall Street bailout ASAP.
The problem with any private entity is that they don't know how low they will go. Public firms will be hit with "mark to market" which may destroy the entire value of any financial asset whether it's performing or not based on what's been happening. Private companies are waiting to see what will happen. Most are already well stocked with these assets and before they buy much more at 45 cents on the dollar they want to see if they will go to 10. Yes, eventually the private equity people will clean up the mess but credit as we know it will disappear for the foreseeable future. The FDIC will take over half the banks and many public firms will fail. Welcome to the real Great Depression.

PIMCO al la Bill Gross has actually fed the problem with his "great insights" on CNBC et al. He was buying this debt but now he's suddenly realized his funds may go down the toilet with everyone else. When cash is king, his stinkin' bond fund stinks.

If I was Bernacke, I'd give a great resignation speech and say congress can decide whether the economy should collapse or make a big profit for the taxpayers by extorting performing assets from terrified financial companies.
__________________
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius
2B is offline   Reply With Quote
Old 09-24-2008, 09:42 AM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Quote:
Originally Posted by 2B View Post
If I was Bernacke, I'd give a great resignation speech and say congress can decide whether the economy should collapse or make a big profit for the taxpayers by extorting performing assets from terrified financial companies.
Me too!

It's not like Ben needs his next paycheck from the fed govt to be able to make his mortgage payment! As I've been saying in various threads, whether it's fair or unfair and for better or for worse, the ball really is in Congress's court. The majority party can call the shots with no fear of veto. They understand their mission as it was given to them by the voters that put them in power to change things. Now, get busy, take the bull by the horns and make the necessary decisions and stand by them going forward.
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Old 09-24-2008, 11:55 AM   #19
Thinks s/he gets paid by the post
2B's Avatar
 
Join Date: Mar 2006
Location: Houston
Posts: 4,330
Quote:
Originally Posted by youbet View Post
Me too!

It's not like Ben needs his next paycheck from the fed govt to be able to make his mortgage payment! As I've been saying in various threads, whether it's fair or unfair and for better or for worse, the ball really is in Congress's court. The majority party can call the shots with no fear of veto. They understand their mission as it was given to them by the voters that put them in power to change things. Now, get busy, take the bull by the horns and make the necessary decisions and stand by them going forward.
I've been listening to Bernanke's testimony this morning while gd-II was sleeping on my stomach. She kept me from upchucking at the political diatribes and posturing going on. Even my own congressman (Ron Paul) spoke out of both sides of his mouth wanting the markets to work, tax payers not to foot the bill and to not have anything get really bad.

I'm amazed at how well Ben keeps repeating "significant credit tightening," "continued housing deterioration" and "substantial equity erosion" without telling these buffoons to shut up with the BS and do something to help.

I've been no fan of Bernanke from his first misguided rate increase that he used to show "he would fight inflation." The Fed and Treasury have been consistently behind the curve and have not stopped anything bad from happening. The next step they have suddenly realized is a big one. They threw every brick they had at it and it isn't enough. The asset confiscation now seems like the best route forward. Now congress is worried about "Main Street not bailing out Wall Street." Many also seem to see this as a chance to cram every social engineering scheme imaginable into the bill.

Bernanke has stated the same thing I've been saying is that the "buyout" will assume assets at "fire sale" prices and they can hold them without worrying about marking to market. By providing a reasonable market for these securities, they can infuse the phantom capital that has been lost due to this silly accounting rule.
__________________
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius
2B is offline   Reply With Quote
Old 09-24-2008, 12:08 PM   #20
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Do recall that Bens main qualification leading to his appointment was that he was able to take all the tactics and things done and invent a strategy that seemed to fit them.

Usually stuff is done the other way around. You come up with a strategy and then draft tactics to implement it.

This crisis seems to be getting the same approach. Lots and lots of tactical stuff getting done, no big picture strategy or framework to either take our medicine or heal the whole.
__________________

__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Bailout not a done deal Zoocat FIRE and Money 44 09-22-2008 10:17 PM
AIG Bailout? Purron FIRE and Money 75 09-22-2008 10:53 AM
Subprime Mortgage Bailout armor99 Young Dreamers 129 09-19-2007 03:40 AM

 

 
All times are GMT -6. The time now is 01:40 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.