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Will the bailout work?


Will the bailout work?  

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Will the bail out work? Obviously a very good question.


Lets think about what its designed to do.


The main issue in financial markets at the moment is the lack of liquidity. Markets almost imploded 2 weeks ago. It was close.


Why is there a lack of liquidity?


Well it comes down to counterparty risk.


Financial institutions didnÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢t want to lend to eachother because they didnÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢t know whether the counterparty would still be in existence the next day. In the last 2 weeks we have had LehmanÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s, AIG, MerrillÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s, B&B, WaMu, etc etc go under/cease to exist. Not to mention the Fortis news today and the Wachovia news coming any day now.


Anyway, the point is that without counterparty trust, the worlds financial system will collapse.


The main issue with a lot of the balance sheets of US and European banks is the problem loans. As we all know, they started with subprime loans, and are now moving to Alt-A loans (in the US) and also some of the European RMBS (specifically UK and Spain) issues.


So this bailout is designed to cleanse the balance sheets of these financials so counterparties will have confidence to continue to lend. Its as simple as that.


A few related comments:


1. The US government will likely ultimately make money by holding these mortgages to maturity

2. There may be some mark-to-market implications for the banks when these loans are bought by the government. The investment banks have had to mark-to-market these loans, and have been writing them down over the last 12 months. The banks on the other hand, havenÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢t, because the loans are being held on a hold-to-maturity basis. So if the banks participate in this bailout, there is a good chance that they will suffer write-downs. (But this will be a one-off and may the trigger for the SWFÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s to come in)

3. What we are seeing both here and OS is credit rationing. Banks not lending for lines of credit, or to small and medium businesses. This is contributing to the economic slowdown. Banks cleansing their balance sheets will result in their cost of debt coming down (look at the CDS spreads as a measure of debt financing) which will then enable them to resume, to a certain extent, some of this lending. That will have the effect of contributing to economic growth.


So yes, the bailout will help. It obviously wont change the slowdown that is taking place in the US, but it will help.


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In reply to: Livas1 on Monday 29/09/08 05:38pm

Wrong, the bailout is designed to rip off the tax payer to help fund the rich corporate America and World even though they were the cause of this credit crunch in the first place, if they want money then get it off private companies not the tax payer that is already suffering from this in the first place. The bail out solves nothing, it places a ST bandaid on a patient, it does nothing fix the disease, it prolongs the agony and will only create a deeper and more severe depression than it would have if the bail out failed.



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In reply to: frmthefuture on Monday 29/09/08 06:04pm

I want to know


1 Who is this bail out unfair to? Obviously the taxpayer is paying but how does that equate in the day to day? Who isn't going to be bailed out? Who is. Who decides?


2 What OTHER forces are out there that the bailout is not considering?


3 Is the bail out ENOUGH? That is the one I would hate to say no to, and who can know if they need more, and where is that going to go?


4 What sorts of fears is the bail out dealing with at a macro economic perspective, and what fears will be around if it doesn't work? duh I shudder!


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QUOTE (frmthefuture @ Monday 29/09/08 04:04pm)

It also comes down to all involved parties wanting it to work.

Let's look at it from that angle.


The impression I get from the US Senate is, they find that the executives, fund managers, advisors, supervisors have all neglected their "duty of care" for other people's money, looking instead after their own self interest, bonuses, options, and "success fees". Like many, I understand and share that view; I've been disgusted by the sheer manipulation and rip-offs for years.


Now they're told the party is over, you've got to behave and do the job right for - comparatively - little or no remuneration.


I ask you: How enthusiastic would YOU feel if your job description and KPMs changed in this way? Would you pull your socks up, work your butt off - for the first time in your lives work really hard for a living, wracking your brains that you've so far rarely if ever even needed? (How many of them would even have the numeracy, analytical skills or "smarts" that the new job demands? When I see some of the reports and valuations, I'm having serious doubts about most of them...)


Could the Senate present another alternative? Maybe take a leaf out of China's book? What happened to the bosses of companies that "enhanced" milk with melamine? Better not ask...

But how about freezing all assets and use the yachts, villas, planes, cars, jewelry of those execs and consultants as security against the bailout money? Hey - and what about their "escorts" and their villas, pools, diamonds...? And why stop there? For years, the law makers, politicians, auditors, and official watchdogs have been accomplices to the ripoff - by turning a blind eye, not doing THEIR job, and awarding themselves huge salaries and perks, using the perks of their opposite numbers as an excuse to line their own pockets.


Would such a scheme be fair, reasonable, just? Of course it would: In the real world, people get paid for results. And, sadly, that's the very reason why any such scheme won't be successful either: If it's true that Paulson was lured into his job with several hundred Million, it's not very likely that he would support a Plan like that. (Allegedly it was a five with eight zeroes behind it - extremely obscene if true.)


SO: given that neither side seems to have the right incentive to make it work, odds are it'll be just another way to rip a few hundred Billion more off the masses for the benefit of a small bunch of super-rich bar studs and their retinue. http://www.sharescene.com/html/emoticons/thumbdown.gif

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Bail em out and they live to fight another day. ( AND come up with a new way to rip people off).


I have no doubt new products will be devised and it will happen all over again.


Legislation and governments will always play second fiddle to big business and financial markets. Governments see no further than the next election. Who pays to get governments elected????????? People with an interest.




Personally I don't think it will be enough!!!!


All the best




PS Just hope the chinese don't stop buying US debt or there really will be a blood bath.


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In reply to: arty on Monday 29/09/08 09:51pm

Hello Arty


I think the senate was correct in rejecting the deal.


I think the way to go is to Nationalise all banks in the USA. Looks like none of them are worth anything. Run them for a few years until all this rubbish works its way through, and the privatise them again at a huge profit. By the way, by Nationalizing, I mean take them over. No compensation. If shareholders don't like it tough. They will remain shareholders because the banks would now belong to everybody. As it is, shareholders have nothing anyway.



Think my ideas are drastic? I am proposing that a minority suffer for the good of everybody. What the package wants to do is make every body suffer for the benefit of the few.


I just have to laugh when I hear people getting paid "thosand of dollars per hour" needing incentives. Ever heard the term "ask not what you country can do for you, but what can you do for your country?" How much do we now need men of vision like that compared to the FWits who have been runnings the USA?







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QUOTE (Avenger @ Tuesday 30/09/08 07:06pm)

yup, Avenger, I like your way of thinking http://www.sharescene.com/html/emoticons/tongue.gif

Question is: Does the Government's Administration have the brains to spare? Aren't they suffering from the same kind of "delusion of adequacy" that those Wall Street "eggspurts" still seem to have? Politicians and Public Servants ... better change the subject http://www.sharescene.com/html/emoticons/thumbdown.gif


Anyway - I think your proposal to nationalise, while it probably has a fair prospect of success, still doesn't go far enough: My sense of justice says those responsible (see my earlier post) ought to be held accountable and made to pay. The Enron prosecution comes to mind. Or closer to home, the Bell Group and HIH cases - they didn't nearly go far enough either. http://www.sharescene.com/html/emoticons/devilsmiley.gif

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THE US Senate has passed a historic bill to approve the revised $US700 billion ($875 billion) rescue package for US and world financial markets.

The vote was easily won 74 to 25 and the bill will now head to the House of Representatives, which spectacularly voted down an earlier version of the bill on Monday, sending global stockmarkets plunging and freezing credit markets.




Now we wait to see if House of Reps passes the bill, perhaps not a done deal.


Cheers Charles


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