“The only way for the government’s plan to actually “save” the banks is for them to buy the assets at well above market value. And that’s unlikely to be profitable for taxpayers.”
Yes, I quite agree. What we have in the credit markets is the refusal of the banks to realize the (impaired) values of the underlying assets. Other banks, full of the same crap, are understandably unwilling to buy these assets, plus they need to shepherd their cash for the sake of their own balance sheets.
So, what Hank is proposing is for the US Govt in the form of the Tsy and the Fed to create its own “off-balance-sheet” entity, a giant black hole of toxic, radioactive debt, which the Tsy and Fed will not only assign arbitrary values to, it can command the holders of same to sell at those values and presumably, it can command other banks to BUY those assets at those arbitrary prices. It’s beyond extraordinary. It’s truly Alice in Wonderland.
By the way, the “$700 billion” limitation is an obvious canard, because it is “$700 bil at any one time”, which means that the entire debt of a seized FNM or FRE or anyone else can be cycled through the system, tranche by tranche, until trillions have been laundered. Even if the $700 billion is exceeded, the act exempts the actions of the Tsy from any administrative or legal scrutiny. So that’s that.
Now, the Tsy can literally ORDER the banks to unload their impaired assets at a price or prices the Tsy in and of itself, in its absolute and unassailable determination, deems appropriate. If some banks become instantly insolvent as a result, then those banks’ deposits become the likewise immediate problem for the FDIC. Where might that money come from?
In the end, I believe the banking world will divide into three classes: 1: The recently vaporized. 2: the barely functional, and 3: The FOH’s, the Friends of Hank, who will become the owners of enormous swaths these assets at fire sale prices. It’s likely to be the greatest transfer of wealth in human history. The Tsy can indeed “apparently” make money on these forced transfers by forcing an impaired institution to sell at 20 cents, then resell same for 30 cents to GS or JPM. (Lkely to be at the top of Hank’s party list)
However, when it’s all said and done, if the Fed and Tsy are committed to making foreign debt holders whole and committed to making ALL money market depositors whole (an absolute logical impossibility) and all FDIC-insured deposits whole, then I don’t see how the world does not see this as a massive money printing exercise.
And furthermore, if the Tsy can so drastically change the rules in the middle of the game, I fail to see how this maintains the US as a desirable place in which to invest. Because there will be no functional nor discernable definition of “cheap” or “expensive” any more; there will just be those unknowable (except for the FOH crowd) price points where Tsy blows the whistle and changes the rules again.
And in four months, it could well be the Friends of Barack who'll have access to that cash. Which is why you will see the Democrats falling in line to support this even if they don't get the pork they want included in the bill.