What's the True Cost of the Bailout

[TromboneAl]

Everyone's talking about the 700 billion or 1 trillion dollar price tag of the bailout. However, from my limited understanding, there will be some return on this purchase of mortgages, etc.

Could be that the cost will only be, say 300 billion. The U.S. could even make a profit, yes?

 

[utrecht]

Ive heard a couple experts say its possible a profit could be made. However, I think that anyone who tries to make a real guess as to what its going to cost (or how much profit will be made) is exactly that...a guess. They dont even have a clue exactly how its going to work which is why they want so much "flexibility"

 

[MasterBlaster]

Bailout Costs

Nobody knows how much the (net) cost will be.

Nobody knows what those Collateralized Debt Obligations will sell for and what their ultimate payback will be. They will be worth less if the feds start letting people skip out on paying their mortgages back, so the legislation is a factor. Clearly the CDO's are worth more than zilch though, so the bailout cost will certainly be less than $700B.

Another way to look at it is... What happens in the absence of a bailout. Do tax collections drop as people and companies go under. What is the lost tax revenue in the absence of a bailout. It just may be that the cheapest way to get out of this is through a bailout.

However that is tempered by all the goodies that will be given out to get this legislation passed.

 

[Nords]

The U.S. could even make a profit, yes?

Only after the elections are over...

I've always wondered how the 1980s S&L trust company made out when it finally closed its books. But a realistic audit of that era would probably be filled with too many political land mines & hand grenades.

 

[al_bundy]

i've read somewhere that the total cost of RTC was around $124 billion when it finally closed up shop. a lot less than the $900 billion estimates thrown around back in 1990

 

[Culture]

Here is the main problem. In theory, and even in practice if run properly, a large profit could be made. However, once the government takes possession of these mortgages, the mortgagee, who are voters, will start screaming for some sort of "relief," which will translate to the government pandering to the voters and giving away the farm. There is not way congress is going to tell all these voters that the government is going to make a profit off these loans.

edit: spelling.

 

[OAG]

How is the bank to lend money if they sell the crap to the Treasury BELOW their Book Value? That is the only way the "taxpayer" can profit - get lots of mortgages for very low prices with the "hope" some will actually result in a profit (be paid at stated terms) while others will just default (never get paid) and enough of the former to offset the latter. In order for the bank to be able to lend (free up cash to lend) they HAVE to sell ABOVE Book Value - in which case the "taxpayer" will NOT profit. And now they throw into the mix Auto Loans, Student Loans, and whatever other credit instruments that have "clogged" up the Bank. I wonder how many of those there will be. This is just stupid. Mr. B says if nothing is done it will be "painful", well maybe that would be more of an abject lesson than just obligating all of use to pay for the debt of the (relatively) few.

 

[al_bundy]

there has been talk of helping distressed owners with a refi and the government taking an interest in the home. when the person sells the government gets a chunk of the capital gains of the home. a lot of low downpayment/low income programs work like this at state level. the democrats represent all the big financial centers so no matter what they say on TV, don't think they will let people slide by and the government take the hit.

 

[donheff]

I've read a lot of stuff on this and I get the impression it is "possible" that we could get out without a huge loss if we hit the right valuation window (that has to be above current market value or the action would not do anything for the financial industry). But how to hit the right valuation window (enough to make an immediate difference for the industry but at a premium that can be substantially made up in growth of the underlying asset value over a reasonable time) is a question no one seems able to answer.

It seems impossible to fairly assess the risk. A lot of heavy thinkers paint this as financial Armageddon. Others say it would just be a big, but temporary, bump in the road. If all we are facing is a run of the mill recession, I agree with those who say "why should we all suffer to bail out the few?" But if we are facing Armageddon we will cut off our noses to spite our faces by letting the much vaunted market sort it out. If we choose the bail out approach, it seems we have effectively concluded that a pure market approach invites a level of volatility we can't risk. We will have to erect a sensible regulatory structure for the future. My gut tells me that is the right approach (or maybe the left approach).

 

[OAG]

If this goes through as originally written (and although I hear Congressional words to the effect they have been "writing a bill as we go along" from House members). I have only seen the Secretary's first "draft of a plan" I doubt it will work. Additionally, I do not trust the Congress to come back, after the election, and really get down and "fix the system". They just do not impress me as actually having any incentive to try to do that - there is just too much money going into the reelection coffers from the special interest groups that started this crap. Too bad Term-Limits was found to be unconstitutional!

 

[2B]

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.

 

[W2R]

Everyone's talking about the 700 billion or 1 trillion dollar price tag of the bailout. However, from my limited understanding, there will be some return on this purchase of mortgages, etc.

Could be that the cost will only be, say 300 billion. The U.S. could even make a profit, yes?

Placing "only" and "300 billion" in the same sentence makes my eyes water!!!

 

[OAG]

2B: I really hope you are right, and I am wrong. Only time will tell. However, as far as a profit, the Secretary at the hearings today refused to say there would be a "profit for the taxpayers". He was asked the direct question and said he would not go that far. Of course that does not mean there will not be profit.

 

[2B]

2B: I really hope you are right, and I am wrong. Only time will tell. However, as far as a profit, the Secretary at the hearings today refused to say there would be a "profit for the taxpayers". He was asked the direct question and said he would not go that far. Of course that does not mean there will not be profit.

Paulson worked very hard to say nothing specific. Bernanke was actually more direct in my opinion. They were all asked specific questions but they can't be blunt. Reading between the lines it's not hard to see that they see a major downside to not doing what they are proposing. They can live with some add ons but not many and nothing substantial.

The AIG assets they took over (88% equity option) are primarily performing assets that have been "marked to market" to such a low level that they fell below an acceptible capital level. As the assets reflate, the government will potentially see a windfall if they exercise their options.

The change the government brings to the game is that they aren't subject to mark to market. They can sit on assets until they mature. They aren't subject to any of the normal capital levels. Their biggest worry is collapse of the economy.

 

[frayne]

This may be a very simplistic comment but I don't think anyone has their arms around this issue and when the government says I am here to help you, red flags go up in my mind.

 

[Gone4Good]

How is the bank to lend money if they sell the crap to the Treasury BELOW their Book Value? That is the only way the "taxpayer" can profit

Not true. "Book value" may or may not have any relation to economic value. And even "market value" is somewhat suspect in the current environment. Just because someone isn't willing to buy your house today, doesn't mean it has no value.

As it stands today, banks have to set aside reserve capital against the "assets" they hold. The more risky the assets, the more capital. If you replace those assets with cash (say at book value), you free up a lot of capital for the banks.

From the government's perspective, they hope the banks have written down the assets to below their economic value (because no market exists to price the assets at the moment). The government wins if the economic value is actually higher. They can also win because their cost of funding is so much lower then financial institutions. Many of these securities are still performing (paying interest) and yielding 20%+. The government borrows at ~4% and buys assets yielding 20%+ . . . even with a high default rate, they can still make that math work.

 

[Gone4Good]

Everyone's talking about the 700 billion or 1 trillion dollar price tag of the bailout. However, from my limited understanding, there will be some return on this purchase of mortgages, etc.

Could be that the cost will only be, say 300 billion. The U.S. could even make a profit, yes?

No one knows but I think the administration is trying to back-peddle rapidly from the idea that this is a $700B expenditure. Presumably the securities will be worth something (on average). They've already been written down, it's not like the government is proposing to buy these at face value. It would be shocking if they took more than a 25% haircut on this, but who knows.

 

[socca]

When a space shuttle explodes, we don't throw $1 trillion at a bunch of engineers, and walk away thinking that we have fixed the problem. Instead, we pay $20 million to do a careful analysis to identify the problem, and then we spend a billion or so to fix the problem once identified.

I haven't heard anything coming out of Washington to make me think that anyone has really identified the problem. The bankruptcy of Goldman Sachs, Morgan Stanley, and other investment banks may not be the outcome to be avoided at all costs, but merely capitalism operating exactly as it should. Of course, with Paulson's immense emotional and financial ties to Goldman Sachs, we would expect him to do anything within his power to keep it solvent. However, what is good for Paulson and other investment bankers may not be good for the majority of taxpayers.

Where is the detailed, thorough, responsible analysis of our economic system that persuasively demonstrates that bailing out Wall Street is the correct action to take?

 

[Gone4Good]

When a space shuttle explodes, we don't throw $1 trillion at a bunch of engineers, and walk away thinking that we have fixed the problem. Instead, we pay $20 million to do a careful analysis to identify the problem, and then we spend a billion or so to fix the problem once identified.

A better analogy is that the space shuttle is already aloft and most experts think it might burn up in the next couple of days raining fiery debris all over the US in the process. We can spend $1 trillion to send up a rescue rocket, which may or may not be able to rescue the shuttle, or we can spend $20MM studying our alternatives over the next couple of weeks and see what happens.

 

[free4now]

Well, Buffet's saying the fed should be able to make money on the bailout rather than lose money. Normally I'd trust him, but he's got a big dog in this fight. I'm assuming his duty to his shareholders to make his deal go through is more important than his duty to give taxpayers his true thoughts.

It seems that everyone with enough information to know what will happen is also a biased insider to this bailout, so who knows.

My personal gut guess is that when all is done and said that we'll net spend about 25% of the 700 billion, but that more funds will eventually be committed when this first bailout isn't completely successful, and overall we'll end up spending around 1 trillion net including Fannie, Freddie, AIG, and Bear Stearns.

 

[al_bundy]

When a space shuttle explodes, we don't throw $1 trillion at a bunch of engineers, and walk away thinking that we have fixed the problem. Instead, we pay $20 million to do a careful analysis to identify the problem, and then we spend a billion or so to fix the problem once identified.

I haven't heard anything coming out of Washington to make me think that anyone has really identified the problem. The bankruptcy of Goldman Sachs, Morgan Stanley, and other investment banks may not be the outcome to be avoided at all costs, but merely capitalism operating exactly as it should. Of course, with Paulson's immense emotional and financial ties to Goldman Sachs, we would expect him to do anything within his power to keep it solvent. However, what is good for Paulson and other investment bankers may not be good for the majority of taxpayers.

Where is the detailed, thorough, responsible analysis of our economic system that persuasively demonstrates that bailing out Wall Street is the correct action to take?

roubini supports it

 

[Gone4Good]

Normally I'd trust him, but he's got a big dog in this fight. I'm assuming his duty to his shareholders to make his deal go through is more important than his duty to give taxpayers his true thoughts.

You might trust the fact that the same day he made those comments he stuck $5B into Goldman Sachs.

 

[audreyh1]

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.

Great post 2B!

Audrey

 

[OAG]

Not true. "Book value" may or may not have any relation to economic value. And even "market value" is somewhat suspect in the current environment. Just because someone isn't willing to buy your house today, doesn't mean it has no value.

As it stands today, banks have to set aside reserve capital against the "assets" they hold. The more risky the assets, the more capital. If you replace those assets with cash (say at book value), you free up a lot of capital for the banks.

From the government's perspective, they hope the banks have written down the assets to below their economic value (because no market exists to price the assets at the moment). The government wins if the economic value is actually higher. They can also win because their cost of funding is so much lower then financial institutions. Many of these securities are still performing (paying interest) and yielding 20%+. The government borrows at ~4% and buys assets yielding 20%+ . . . even with a high default rate, they can still make that math work.

Thanks for your comment, it makes sense, at least to me and clears up something that was really "blocking" my understanding. However, I just hope the Treasury does not pay too much. Also that the dollars coming out of this program (the taxpayers "profit") does not get eaten up by the Congressional spenders of every political stripe. Now off to the Doctor for some anti-cynic medicine.

 

[HFWR]

Now off to the Doctor for some anti-cynic medicine.

If you're not cynical, you're just not paying attention...