Posted on 10/14/2008 8:10:59 AM PDT by Candor7
We like the new bailout. We think it will ease the credit crisis and get banks lending to each other again (if not to consumers). The Treasury is finally focusing on the equity side of the balance sheet: The taxpayers' money will go farther here and address the major problem--insolvency. Equity injections will also allow taxpayers to participate in the upside when (if) bank stocks recover. The preferred stock structure makes sense, as does the "callable" feature in which banks can buy out the security in three years.
All that said, we still have one big question: What about future writedowns?
A key component of successful financial system bailouts in the past has been forced asset writedowns, in which the government makes banks reduce the carrying value of this assets to nuclear-winter levels before the government injects new equity. This move does several important things:
It removes the fear that banks and bank investors will be hammered by future writedowns
It turns the banks' attention 100% to putting the new equity to work
It attracts private capital (because investors won't worry about getting sandbagged)
It eliminates the death-by-a-thousand-cuts scenario that killed Japan.
To put some numbers on this: So far, US financial institutions have taken about $650 billion in asset writedowns. Nouriel Roubini and others have put the total expected writedowns at $1-$2 trillion. This suggests that banks still have $350 billion-$1.350 trillion in losses to take. Losses in this range could wipe out common shareholders, the government, and the financial institutions....unless the banks can easily raise additional equity to offset the losses.
The government may be hoping that 1) the writedowns are done, or 2) the banks can just slowly write off the rest of their crap assets against earnings over the next several years (thanks to the elimination of mark-to-market accounting). Given the magnitude of the projected losses, this seems like wishful thinking.
Alternatively, the government may plan to just keep injecting more and more capital until the writedowns are finally done. If this is the plan, however, other private-market investors are unlikely to follow suit.
So we have one remaining and important question for Messrs. Paulson and Bernanke: What about the future writedowns?
More money for financier welfare dependands?
This is why the Dow rally is short term. "Gather ye rosebuds while ye may."
The guided stack market crash of 2008.
Hell bent for election.
And then after? Checkmate.
We're talking an estimated $14 TRILLION in "offshored" assets here! Bringing back 40% of it (circa US$5.6 trillion) would allow for quick writedown of the rest of the bad assets and provide a new liquidity base to open new loans and lines of credit.
Absolutely correct. Congress will not alter the laws, programs or legal blackmail procedures at the heart of this meltdown. So it must recur about every 10 years.
Thanks for the ping, Candor7.
Pinging.
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Adding to the thread. [No problem, the government can always print more money. Tip for the day, buy your Wheelbarrow now.]:
With thanks again to Candor7
“Liquidating the Empire”:
http://www.freerepublic.com/focus/news/2105177/posts?page=11#11
http://www.freerepublic.com/focus/f-news/2105177/posts?page=32#32
http://www.freerepublic.com/focus/f-news/2105177/posts?page=21#21
I agree Ray. But for that to happen the Capital Gains tax and any inheritance tax has to be extremely reduced. These two taxes have driven the capital you describe off shore to places like the Bahamas and the Cayman Islands.Some Americans have even filed a formal renunciation of their citizenship to avoid paying these punitive taxes.
Many question their patriotism, but I really do not blame them. I know people who tripled their estates in 10 years doing that, and who live in tropical serenity.
Getting that capital back could happen, but would necessitate a sea change in the socialist politics and taxes which badger America into economic oblivion.
The bail out went in the wrong direction. The should have immediately suspended capital gains and corporate taxes, and then let the crash happen.
The crash IS happening. Its just so slow that most people do not realize it.
Creeping Death instead of Instantaneous Death.
All our funds are legally placed offshore, as well as our portfolio management. We pay our taxes in the USA though, but we may actually be forced by this bailout to emmigrate to an offshore location in order to have a viable retirement. If Obama wins , we will likely make that phone call and liquidate everything we own in the USA.
Pouring money directly into banks has a much better, more direct impact on the problem of banks not lending money, than the indirect method of buying the toxic paper. Paulson unwisely planned to buy the bad bonds from the banks to reduce their losses, then wised up to a world begging him to recapitalize the banks directly. This is a more affective attempt at unclogging bank lending with a better chance of success than the other bone-headed idea of buying the toxic paper.
Hence the reason why I support the FairTax system. Under FairTax, we tax based on actual consumption, not on income. This means there's no such thing as income taxes, alternate minimum taxes, corporate taxes, taxes in savings interest, taxes on stock dividends, taxes on capital gains when you sell a property or stock, or estate taxes. In short, the USA effectively becomes the world's largest legal tax haven, and not only will we get a huge fraction of that US$14 trillion "offshored" coming back to the USA, but also add several more trillion dollars coming in as foreigners take advantage of our improved tax situation.
Thanks for the links goes to LucyT.
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