Paulson-Cantor Plan Is a Win-Win for Taxpayers

National Review ^ | September 26, 2008 | Larry Kudlow

[Huck]

I fear we are looking at the long desired-by-Democrats final transition to socialism. FDR made the first big step economically. LBJ added a huge social component. Now maybe Bush and this Congress will put it over the line.

I can't understand how or why there seems to be an unending supply of left wingers laying siege to our institutions for decade upon decade. It never ends. I just don't get what motivates these people.

[9YearLurker]

What’s that law in physics about anything that is observed is changed by the observing?

I think there’s been so much talk about helping out people who are behind on their mortgages that people with new loans and little equity, especially, are now testing and fishing for the help they know they’ll only get if they are behind.

[mockingbyrd]

“I don’t think a lot of folks understand this win-win scenario. Let me repeat: The taxpayers own the bonds the Treasury buys; the taxpayers own the cash flows generated by the bonds; the taxpayers own the profits when the bonds are sold; and the taxpayers benefit when the profits and cash flows are used to pay-down government debt.

See, this is my problem with this. I don't win at all. All that happens is that possibly the treasury makes a ton of money on this. Which will be promptly spent on a host of new government programs. Does anyone think the taxpayers will see any of this? Hell no! But we will then be on the hook for brand new programs initially funded by this supposed windfall. Will those programs be cut when the money runs out? Hell no!

The only way this could possibly be a win-win-win for taxpayers is if this money HAD to be used to pay down the national debt. And there's no way that will happen.

[SunkenCiv]

Major “Earmark” in Democrat Bailout Agreement
(URGENT must read -ACORN and more)
Blogs 4 McCain | 25 September 2008 | Bill Smith
Posted on 09/26/2008 4:04:56 AM PDT by SE Mom
http://www.freerepublic.com/focus/f-news/2090926/posts

The Democratic ACORN bailout; Update: Video added
(Hidden in the Paulson Recovery Plan?)
Hot Air | 7:55 am on September 26, 2008 | Ed Morrissey
Posted on 09/26/2008 6:11:36 AM PDT by Ernest_at_the_Beach
http://www.freerepublic.com/focus/f-news/2091002/posts

Tell Congress & President Bush:
NOT ONE PENNY FOR ACORN! PHONE FAX WRITE NOW!
various
Posted on 09/26/2008 1:33:36 PM PDT by cgk
http://www.freerepublic.com/focus/f-news/2091322/posts

[Nascar Dad]

btt

[9YearLurker]

“I fear we are looking at the long desired-by-Democrats final transition to socialism. FDR made the first big step economically. LBJ added a huge social component. Now maybe Bush and this Congress will put it over the line.”

Kind of like it took Nixon to open up China.

[SunkenCiv]

Sources also tell me that other conditions will be necessary to bring the House GOP along.

1. the ACORN slush fund must be removed
2. the so-called union proxy to run a slate of corporate directors is a big problem
3. 100 percent of profits must be used to reduce the national debt
4. Republican members are opposed to bankruptcy judges setting mortgage terms and interest rates (Obama also is opposed)
5. the so-called government equity ownership of banks is distasteful because it effectively creates a corporate tax increase on banks
6. the Treasury secretary's request for $700 billion is regarded as way too high

[freeandfreezing]

Uh, the principal and interest payments from the homeowners go to treasury. 99% of the loans are “performing” -— that is, the people pay.

If that is true then there would be a private market for the securities. If the holders of the securities are willing to sell them to the government, and in doing so take on a number of onerous provisions (SEC audits, limits on executive pay, etc.) wouldn't they be just as willing to sell them to some private party for the same amount of money? Of course they would.

So why aren't the holders of the securities selling them, and why aren't private buyers buying them? (After all the cheerleaders for the bailout swear the Treasury is going to make a giant profit.) Because the securities are worthless, thats why!!!!

[Toddsterpatriot]

That means they will buy worthless securities such as credit default swaps.

Why would they buy credit default swaps? As the market gets more nervous about credit, the average CDS would become more valuable.

You really should stop talking about CDS, you're confused about how they work.

[freeandfreezing]

The Treasury (which is a bank) would be in a similar situation, except instead of having fronted 100% of the principal, and just getting interest, it would be BUYING THE NOTES AT A DISCOUNT -— say 90 cents on the dollar -— effectively getting 14-15% return on the money (10%, plus interest)

If that is true wouldn't private investors being buying these securities as fast as they could? Show me another investment that is generating 14-15% right now. In fact, if your return analysis is correct, all the government has to do is host a giant auction of these securities. Investors from all over the world will be flocking in to buy them. No need for the treasury to put up even $1.00.

Of course, the fact that all the full time expert traders of this type of financial instrument won't buy them for any price kind of proves that the 14-15% return is just fiction.

The real problem is that the value of the securities is next to nil, and the holders of them, particularly banks, are insolvent when their holdings are valued at the market. The only way that the bailout plan can keep the banks from failing is if the Treasury overpays for the securities, and thereby recapitalizes the banks through their overpayment.

[arthurus]

Control. They are collectivists who believe that humanity is one organism and must be regathered in to function as one organism, the left,especially the academic left, bing that organism's brain. Put another way, Mankind is God and the Left is God's brain.

Or they just want control of everything in order to be the Lords in their castles while the rest of the world toils on their estates.

[palmer]

Why would they buy credit default swaps? As the market gets more nervous about credit, the average CDS would become more valuable.

Not really. That will happen to individual CDS from a counterparty for a while, but eventually the CDS counterparty (seller) default risk rises to the point that all its CDS become worthless. That was the primary reason AIG had to be rescued; they had increasingly likely indivudual CDS obligations for MBS (which did indeed become more valuable for the CDS buyers), but it got to the point that they would be unlikely to pay those buyers, so all their CDS became worthless all at once regardless of the individual default risks.

[Toddsterpatriot]

That will happen to individual CDS from a counterparty for a while

Hmmmmm....what will they buy, MBS that are dropping in value or CDS that are rising in value?

That was the primary reason AIG had to be rescued... all their CDS became worthless all at once regardless of the individual default risks.

And AIG is still in business. I guess their CDS aren't worthless. The Feds aren't trying to rescue the CDS market, they're trying to rescue the mortgage market.

[palmer]

The CDS are falling in value on average due to increasing counterparty default risk, and by purchasing them the Treasury would increase their value on average.

AIG got a bridge loan to keep going that the market could not provide. They issue CDS (they are the counterparty), I don't know how many they have if any.

The Treasury can help the CDS market rise on average by buying the MBS thereby lowering the risk that a major CDS counterparty like AIG will default.

[dsutah]

Some people on here apparently don’t think so! I guess since he seems to have worked on a joint plan with H. Paulson, they have nothing to say. Somehow H. Paulson is the devil according to some people on here lately! Somehow the whole thing is socialist, or something. I can’t understand it. I guess I should’ve taken a course on economics, then I would!

I thought they took the original plan and worked on it until it was something they could live with. It seems as if Paulson and Cantor are ok with it, what’s wrong?

Somehow I can’t see where E.Cantor would go along with a plan that is unconstitutional (or socialist). I’m sure he pretty well knows what that is, and knows what he’s doing. Or he wouldn’t be in the Congress, would he?

[Toddsterpatriot]

The CDS are falling in value on average due to increasing counterparty default risk, and by purchasing them the Treasury would increase their value on average.

Maybe they're falling due to the lower risk of default?

They don't want to put a floor under the CDS market, they want to put a floor under the MBS market.

The Treasury can help the CDS market rise on average by buying the MBS

Glad you finally figured that out.

[palmer]

I knew that all along, the underlying problem is MBS defaults and anything that helps lower defaults will help the house of cards on top. If they are successful the counterparty default risk will drop and the CDS prices will rise and fall according to the real risks of the insured securities rather than dropping overall like they were when AIG was threatened.

[Toddsterpatriot]

I knew that all along, the underlying problem is MBS defaults

Then why spread the (wrong) idea that they'll buy CDS?

[palmer]

Then why spread the (wrong) idea that they'll buy CDS?

Securities are securities and as long as they are "mortgage-related" they are covered under Paulson's bill. A "mortgage-backed" security would have been a better term to use. Here's the text from the bill

(1) Mortgage-Related Assets.--The term “mortgage-related assets” means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008.

[Toddsterpatriot]

Securities are securities and as long as they are "mortgage-related" they are covered under Paulson's bill.

So you think that in their attempt to buy MBS and boost the prices of MBS that they'll buy securities that will decrease in value if they are successful in raising the value of MBS? I realize that this is the government, but even they aren't that stupid.

A "mortgage-backed" security would have been a better term to use.

Sure.