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But that said, the idea to do nothing as a means of economic catharsis is frankly crazy.
This was in reference to my comment that we should "do nothing" which was followed by my reference to obeying the law.
I dislike word games, and leave that to the politicians.
The basic problem with the bailout is that once started, there may be no end. Pushing the end game is a cheap shot, which means that the final solution may be many times today's cost.
$700 Billion is a bad guess. With $1.6 Trillion at risk...(already spent plus the $700 bn) this comes to $15,000 per U.S.Family... and that's IF everything goes as Paulson "hopes".
Consider this (partial quote):
Quote
He cites research by Citigroup London analyst Matt King, penetrating the smoke and mirrors in the last accounts of the five big New York investment banks.
This shows that while they had a combined $US1.6 trillion in finance secured by collateral on their balance sheets, the total blew out to $US3.5 trillion by the time off-balance-sheet transactions are included. The off-balance-sheet transactions are mainly collateral they have received in "repo" deals, but then on-lent to someone else (repos, or repurchase agreements, are essentially short-term secured loans).
King explains how this funding disappears from the balance sheet. The investment broker sells a hedge fund $100 million of stock in Company A, providing a margin loan to finance it.
The hedge fund then short sells $100 million of shares in Company B, and uses the proceeds to pay off the margin loan. The investment bank now records no change in cash and no net receivable from the client, so there is nothing on the balance sheet.
The investment bank needs to borrow the second stock so that the hedge fund can deliver on its short sale, so it pledges the first, which it is holding as collateral. The investment bank makes a margin on the transactions, coming and going.
So... let me clarify the "do nothing" by amplifying the use of the law to handle the divestment of bad debt from bankrupt corporations. Instead of guaranteeing the bad debt, the government should oversee the disposal and determine the residual value. The ensuing "chaos" will last until the wiser members of the financial community find a way to maximize the value according to the law.
I would suggest that the FED should use whatever "Treasury/Taxpayer" dollars that are needed, be used to make whole the innocents who have been harmed. Hedge Funds and Derivatives have been at the fore of Government advice to investors as high risk.
As to the resolution of AIG... the proposed "controls" on AIG were stipulated before the bailout was proposed. In effect, the bailout precludes the so called "controls".
This is a very intense situation, and, I fear, what we see is just the tip of a very large iceberg.
The derivative problem and the CDS's that ballooned between 2003 and 2007 are the unknown quantity. Stereoman remarked on the comment about banks trading the same security three times, through swaps. This actually happens as the identity of the artificial insurances becomes blurred... each time, with the brokers taking commission, and each time adding to the banks/brokers on or off the book assets. Remember the $1.4 quadrillion notional value of the derivative trade. While the industry uses this as a measure of trading volume, it really isn't. I haven't seen any responsible industry leader place an estimate on the actual value. A closer reading of the cited article above will bear this out.
This bailout is surely a done deal... with the only pushback coming from politicians who pursue their own interests without understanding the problem in the first place. Am afraid I just don't understand the "keeping people in their homes" argument.
