The Fed’s ‘Bad Bank’ could make the financial crisis worse

MoneyWeek ^ | 19 Sep 2008 | David Stevenson

[politicket]

Thank you. Now we have something to discuss...

"I have no problem with the current Fed solution of buying these debts for a set rate."

And what rate would that be? Part of the problem is that most of these "assets" do not have a "value" associated with them.

"The market is panicking and these debts are basically worthless at this point, which in turn is halting the ability to raise additional funds."

If the debts are "worthless" then I ask again - how much should the U.S. government buy them for?

"The government taking on these debts helps to remove this uncertainty from the markets."

Actually, it adds more uncertainty, because the U.S. government has never nationalized a whole sector of private business before.

"The government, having the luxury of time, plans to hold this debts until maturity."

That doesn't make sense. Why would they hold the debt to maturity. They're creating $50 billion dollar tranches. Wouldn't they want to sell the higher rated tranches?

"Hopefully they will be able to earn more from these debts in the future than they are worth now."

You previously stated that these debts are worthless. How can you ever hope to "earn" anything from them?

"The only other option is to let the U.S. financail system collapse which would cost the taxpayers much more in the long run."

Really? I would think that the market would be healthier in the long run. It sure would be hell in the short-term, but the long-run would hold great promise.

See, maybe the author had a valid point or two. It's not easy defending your position...is it?

[frankjr]

“It’s not easy defending your position...is it?”

Actually, it’s not more difficult than defending the other side. If you believe letting that market collapse now will be better for the country, then so be it. I’d rather take a chance on assuming the real estate market will improve in couple of years and in turn it will improve the value of the underlying debts.

Yes, this is low rated debt, with questionable collateral based on the real estate market, but the market moves in cycles and we appear to be at a low point. The markets are not willing to take on the risk at this point because no one wants to be left holding the bag. I have no idea where to value these securities, but the Treasury is going to have to set a price and these financial institutions are going to need to determine if the price is reasonable. Just because a security is worth close to zero now does not mean it will be zero in the future. That is the risk the government (and taxpayers) are going to have to take.

No guts, no glory. Or maybe too much guts, gorey.

I’ll get back to you in 5 years.

[bruinbirdman]

"a guy whose nickname is Helicopter Ben?"

Uncle Ben's helicopter couldn't hold enough greenbacks of any denomination. He had to look to Uncle Sam for his 747.

yitbos

[AndyJackson]

Uncle Ben's helicopter couldn't hold enough greenbacks of any denomination. He had to look to Uncle Sam for his 747.

For heavy socialist lifting you need this brute

[bruinbirdman]

I hear that's hauling bananas for Hugo.

yitbos

[Freedom_Is_Not_Free]

The real estate market will not correct itself in a couple of years. Have you seen this? The Option ARMS are just now beginning to reset in rates and this will go on until 2012 and I understand the volume and value of Option ARM loans are larger than for sub-prime = Bigger Problem for housing.

[Notary Sojac]

Nor will property prices benefit.

It's hilarious to hear comments on "housing prices recovering" when the bubble is still only partially deflated. A real recovery of housing prices would take them back to their income and rent based fundamentals.

One might as well talk about Pets.com "recovering" to its 1999 share value.