Short- to Intermediate-term Paulson Plan Prospects

Discussion in 'Trading' started by brettman9, Sep 21, 2008.

  1. I think everyone is in agreement that our current predicament sucks. And that things look pretty bleak. And that we've already passed a critical point where the best case scenario is a combination of moral hazard and widespread injustice.

    And everyone has done a great job of covering that and pointing out how Paulson is the devil and the end is nigh, etc..

    So, now I would like to turn to the question of whether or not, and - if 'whether - just how, it will work to stabilize lending markets.

    First off, the RTC comparison is just silly. Different function, different conditions, different obstacles, different methodology.

    As I interpret what little we've been given, this is going to be something like a distributed hedge fund that is going to open for business probably late this week or the following Monday with $700bln in the coffers, and the ability to hire and utilize the top talent in the world immediately. All of this is good.

    The problems:

    - They will have to participate in the market right off the bat (which is a tactical disadvantage, but it may not work against them)

    - Since this strategy must depend to some extent upon a market forming above their bid (since they probably will come in at distressed-market pricing, and therefore won't take the fear off the table without competing bidders) the question of true long-run valuation (which is still a mystery) will be paramount. Unquestionably there was a mania in these markets in 2005-2007, where assumptions about long-run valuation became at least as detached from reality as they did in the nasdaq in 1999 and 2000.

    Beyond all of that, I can't help but be struck with the sense that 3 months from now will be one heck of a short.


    As a side note: at this point, the position that many seem to take on this site that we should just let the banking system collapse in a ball of flames - they have it coming! - is more or less analogous to a piece of muscle tissue taking the position that justice ought to be done and we should just let the circulatory system fail (bunch of greedy blood cells!). Creative destruction depends on an environment in whch new people/systems/ideas/etc can take advantage of opportuinites that arise as a consequence of the vacating of a niche. But that niche isn't worth much if the whole ecosystem collapses. Justice should be done. And the circulatory system needs to be overhauled, and a lot of bad cells are going to get away with murder here.

    But you do not want the rest of the body to start shutting down.

    If you look into the intracacies of how, say, your local grocery store does business, you will find a lot that you take for granted in your day to day existence. And, believe me, thats a discovery you don't want to make first hand in six months.