My problem with this whole affair is the complete lack of any meaningful explanation of why Wall Street (or the banks) are in trouble, and how the bailout money would be spent.
For instance. An investment bank bundles and slices and dices mortgages and packages them as an MBS. But then it sells it to someone else. So how is the investment bank impacted if the mortgages go bust?
As far as bailout money is concerned, will it purchase MBS, and from who? Is the investment bank effectively an intermediate who will bail out the purchaser of the MBS?
That goes double for Credit Default Swaps. As I understand it, those are insurances against problems with the MBS. So they default. How does that affect the credit market?
It's smelling more like the bailout isn't to actually rectify balance sheets, but more as a psychological salve for the credit market.
I do not want federal dollars spent for psychological reasons.
If anybody can provide a link to a solid report on the situation, I'm eager to read it. But it had better not have bromides about how "Wall Street can't function".
Over at Calculated Risk, I see that the TED spread (and the A2/P2 spread) is off the charts
, and that the credit market is therefore frozen. Let me be clear:That spread is not in any way the result calculations of numbers on balance sheets.
The "spread number" is simply market mood.
If market mood is the problem, then Prozac is the solution. Not tons of money.
(I'm aware of the irony of inserting an Unhappy Face in a post ranting about how billions of dollars are going to spent so that investor confidence gets a boost.)
"" Credit Default Swaps. As I understand it, those are insurances against problems with the MBS. So they default. How does that affect the credit market?"" --------- the problem is counter party risk, investment banks, brokerages and insurance companies have written OVER 62 trillion in swaps coverage ( notional value ) in a totally unregulated market, no one knows or will admit what their loss exposure is! consensus opinion is about 2 percent up to as much as 4 or 5 percent! do the math!! thats 1.4 TRILLION DOLLARS at the LOW end! and thats JUST U.S, equities! world wide there are in the neighborhood of 400 to 600 TRILLION in CDS contracts written! see the problem! thats a huge amout of risk and NO ONE knows who is on the hook or for how much!. this bailout is ( partly ) about de fusing that risk!. this bailout will not fix this! we ARE well and truly FUCKED! there is SO much more going on here! MBS/ABS/CDO/CRE man o man!! consumer mortgage backed securities ALONE may account for 2 to 4 TRILLION in real losses! then you have commercial realestate LBO paper.. ect..ect..ect! J6P has NO IDEA!! unfortunately NEITHER does congress!. I believe the FED and TREASURY know and they think,hope and PRAY this works, and by work I mean give them some time to figure out how to address the OTHER problems, some even BIGGER!. this a bad scene, I could go on and on! I spent the last 14 months dissecting this issue and I can tell you these problems are immense!! I mean fucking HUGE!. I have little hope for a lasting solution, I felt up until last week that i would heve at least two years to prepare NOW i am thinking, hoping for two to six months!! good luck to all reading this, and god help us!
My completely uneducated guess is that these investment banks own a significant quantity of MBS and the like, and if they were to have to attempt to sell these on the market and reveal their actual value it would effectively reveal (or intimate) the value of ALL such "assets". Given how broadly spread such securities are (say, nearly every major commercial bank and a boatload of smaller banks) this could render the entire banking system illiquid or even insolvent.
I am but a common fool trying to wade through this cesspool, feel free to correct or ridicule at will.
See Phil Gramm was right. It's all psychological, you whiners.
Now give me my 700 billion!!!!
(incidentally, isn't 700 billion what we spend on oil?)