You must love how an amorphous 'breaking news' story popping up on CNBC (or CNBS as I call it) about how the strapped U.S. Gov't had broken plans to design a "RTC-like" entity to "buy up the bad debts on the balance sheets of banks" the country over, and how this would allow those banks to begin "lending to businesses and consumers again," sparked a afternoon rally in equities. Has anyone truly stopped to think about how much bullshit this story contains? It contains so much bullshit that it's nonsensical on its face. Even if you assume the story line is true - How will it be to the benefit of banks saddled with toxic paper to have the U.S. Government give them "pennies on the dollar" for such paper? Most of these instruments are commercial and residential mortgages or development loans that are in default. The bank loaned out money based on likely inflated appraisals done during the bubble-manic times, which means that they would be lucky to recoup 1/10th of their capital outlay from the government - even if there were such a plan. How the hell will taking a 90% or greater haircut on their capital restore confidence and the ability to lend money to these banks that are now under siege and drowning in their own toxic sludge? On a practical level, any such plan would involve sums of money 100x larger than what was involved in the S&L crisis. THE FACE OF THE STORY DOESN'T EVEN MAKE SENSE. TRADE ACCORDINGLY.
Oh - just to put things in perspective - Wachovia ALONE has 120 billion of bad paper. So GOOD LUCK SAVING THE ENTIRE BANKING SYSTEM HANK!!! Resolution Trust MY ASS.
Don't read too much into this guys. But it is triple witch. And the market "has a way" of moving to were it wants to be i.e. ~1200, to make the major players smile when the S&P settles...
you're right,it does'nt make sense and it is nonsensical. however,it sparked a rally and i believe we reached a short term bottom today based on the volume. who knows where we will be in a month but for now,enjoy the short covering.
It is good to keep in mind that the problem for many banks is more one of illiquidity than it is that the notes they hold are worthless. Though, of course, there will be significant defaults. I think the root of this illliquidity can be found in the credit default swap business where far too generous assumptions were being made re the probability of the underlying loans going bad. Now the insurers (AIG is one of them) can't handle the defaults. And with the breakdown of the Credit default swap business the notes held by banks across the country have become far less liquid. My reading of whats likely to happen is not so much a pennies on the dollar scenario, as an exchange of risky notes for government backed notes. The government, since it can both print money and tax, can act as its own insurer, and thus take this illiquid paper off the banks' hands and exchange it for government backed paper that will be liquid. In the final analysis, some years down the road, US taxpayers may effectively end up footing the bill for those gigantic and ridiculous bonuses made by the folks selling credit default insurance using absurd, as it turns out, assumptions about risk. Rather than screwing taxpayers however, it would be much better if this bailout could be orchestrated so that the government has some possibility of turning a profit, and that the companies who created this mess (with complicity of Uncle Same of course) would end up taking an appropriate loss while still continuing to operate. But to pull that off is going to take some very sharp pencils. The very people who got us in to this mess in the first place may not be the best ones to get us out.
whether the plan would work or not is not important. the LESS details that better, reality will kill the party, people will assume that best when their mood changes. its like the M&A/private equity boom, everybody thought their stock would be taken over, the fact they couldn't know one way or the other just added fuel to the fire
Just happens to be news on a trip options friday after a big drop. I remember they did something like this a few months ago the day before options expired.