The government will make a major fortune with the "bailout." First, they avoid the total collapse of the credit system. Therefore, home values will not plummet. Unemployment will not exceed 20%. With a stable and possibly recovering housing market and employment picture, they will avoid the distraction caused by repeated state and local bankruptcies. They will avoid the reduction of 20% of federal tax revenue. But hey, they can alway tax the rich.
Once the "mark to market death spiral" is broken every bank and financial company can mark up to market as stability returns through an orderly auction process. The value will be set by what the actual performance of the asset produces and not the worst case scenario thrown around. Stupid investments will remain stupid investments when the smoke clears. Unfortunately, everything involving mortgages are toxic. Everyone is afraid to buy anything that isn't pennies on the dollar. 95+% of all mortgages are performing. How can all mortgage backed assets be valued between 35 to 65 cents to the dollar?
This problem has been entirely caused by stupid Fed actions and other laws and policies. Mark to market is #1 followed by naked shorting which I still have trouble understanding why anyone would let someone "sell" them a stock and not deliver it as required by SEC regulations. If people can do naked shorts why can't they do naked buys. I could "buy" without committing cash and totally take over the publically traded company of my choice.
This problem needs a quick, direct action to turn the corner. It may be time to actually do things I would otherwise consider stupid like permanently banning short sales (at least until the situation improves but it has to sound permanent). Using the "bailout" as an excuse to load it up with feel-good crap will be worse than doing nothing.
I actually think that when the bozos get done there will be a workable bill that can be implemented to do what's needed. Afterwards, go in and execute those that made money off the weird derivatives, sieze their assets and sell their families into slavery. I really don't care at that point.
You can't stop shorting, that would in essence, stop the market from trading. Imagine a computer aged trading system where computers can't be used, and each trade will force that brokerage firm to manually go seek out someone to sell to match the buy. I guess it would slow down any free fall.
In my opinion, the mistakes were many, and backed wholeheartedly by Congress at the time. They lifted the up tick rule, that was put in place after the Great Depression, and for good reason. Why is it, we can't change an outdated Bill of Rights, but we can arbitrarily lift something as topical as an uptick rule?
We allowed Hedge Funds to classify themselves with the same rights as brokerages, and thusly were allowed to naked short 'til their hearts content. Now as the rules are changing, notice large Hedge Funds either breaking up (to hide assets?), or soon to be declaring bankruptcy (to avoid prosecution).
They've allowed for fancy accounting systems which conveniently make it possible for major corporations to "write off" bad debt.
While I am totally for the bailout, there have got to be rules. And there has got to be a team of accountants brought into these corporations to not only review the books, but to be involved in them in the future. Any company taking a bailout should not only agree to government involvement, but also must agree to wiping out all bonuses for execs for these companies, a freeze on all golden parachutes, and a plan to repay the government as soon as possible. In this way, the shareholders (and bondholders)won't be getting raped as the fat cats flee, and it just might restore some faith to the system. JMO.
Bottom line, hedge funds have exploded in assets, and their leverage advantages using short selling tools that funds and others can't use, finally tipped the house of cards over.
