I spent the last several hours closely watching the hearing and this is what I took from it.
The Fed will hire experts to approximate the full maturity value of mortgage backed securities.
The Fed uses tax dollars to buy these securities at the projected full maturity value.
The tax payers hope the fed’s expert predictions are correct and at maturity we break even.
The current holders get paid this projected full majurity price now, on securities they knew were a gamble when they bought them at fire sale prices.
The banks will take the $700 billion paid to them for these assetts, claim it as capital, apply fractional reserve lending, initiate new loans at interest to the American consumers. This plan hopes to provide liquidity to the markets and “get it up and running again” according to secretary Paulson. He truely believes this is the best plan. Even though, he fully admits that we have not reached the bottom of housing market.
This fact alone shows that this will be a revolving door. In another few months after the market losses another 25% the banks will stop loaning money again and threaten us with complete collapse if we do not fork up more of our treasury.
These junk securities will, among other approaches,l be bought by the US trearury in a “reverse auction”. This means the sellers will be bidding on how little they will accept for thier holdings. Offer too little, and they will not be interested in selling and the plan fails. Pay too much, and it amounts to a windfall for the exact people that messed up and are asking (blackmailing) us to bail them out.
When Secretary Paulson was asked, “Who will be bidding against the Treasury?” His response was, this is an extremely complex issue, with many classes of security, using different approaches, needing more experts, assett managers, experimentation… Basically, the classic statement that this is too complex for you to understand please trust us, we are the experts, BS. He further stated, Once there is an agreed upon bid from the treasury, the price will be discovered and other buyers may come into the auction. “We want braod based authority here.” Secretary Paulson repeatedly said.
We have to lubricate the system by paying maturity value prices for these securities or the private and international bankers will not participate in the plan and the entire world will suffer the consequences. (More blackmail)
Senator Enzi asked, “How are you going to protect the small community bank with this plan?” Bernake responded with, You will have to trust us on that one.
What if we create a large FDIC type fund, financed by investment banks over a certain size? Private banks are not interested in participating in something like that.
Can we do it in Tronches of say, $150B, since you said you are not going to spend it all at once anyway?
Secretary Paulson, “This would be a grave mistake, the market confidence is at stake here, every small business, every car sales, everything we do today depends on these huge multinational banks agreeing to originate new loans. If the US treasury fails to pay off these multinational banks for these junk assetts they will withhold further loans and let the world economy collapse. Every American depends on a healthy market, if you don’t play, everyone will pay. PAy me now or you will pay me later.
Paulson said, we need transparency and strong oversight by congressional committees, but this cannot slow us down, this has to happen quickly and is so complicated with market mechanisms and experts that you must trust us to do what is right for everyone.
Does the treasury have the capacity to administer this? Long story on how complicated this is, but basically NO.
What are you going to do about the obvious conficts of interest between your experts and the securities being handled? Oversight, transparency, evolving process, need to get it up and running…(no answer given)
You will be gone in a couple of months but the senators will be here answering the questions from our citizens if this does not work. We must show potential value in our purchase and make sure we are not rewarding bad behavior. Paulson, This is the least negative choice, it is too complex to explain, the tax payer is on the hook already.
Are we bailing out foreign countries with US tax dollars?
They hire our people, they contribute to our society their problems are our problems, YES
Could this threaten the credit worthyness of the US treasury?
We are buying assetts, not just spending money, it is very difficult to predict the costs and the effect on the treasury. YES
Wh is there a provision that immunizes the secretary of the treasury from any oversight from any agency or court? Doesn’t this in direct opposition to the rule of law?
Have you ever heard of a central bank bailing out foreign banks in the past? Paulson, We must provide liquidity to these banks or they will not loan money to consumers and the economy will collapse.
I am proud of the senate so far. Someone has been doing thier homework this time.