[IWE] Pelosi's viciously partisan speech

[Ben Tilly]

On Mon, Sep 29, 2008 at 9:04 PM, Jay Mehaffey <jaym667@yahoo.com> wrote:
>
> From: Bill Patient <bepatient@cfl.rr.com>
[..]
> Personally, I'm mixed about it failing. Something must be done soon, but
> I'm hoping this will force Congress to build a better bill. The Democrats
> need to take ownership of this, build a bill strong enough to get the party
> to line up behind it, pull in a few Republicans and dare Bush to veto it.

Given how strongly the general public does not want to see a bailout,
building a veto proof majority is essentially impossible.  Were not
every financial expert from Greenspan to Warren Buffett telling them
that the sky is going to fall in, even the current bill would not have
a shot.

I wish that this had been presented in the press more honestly and
informatively.  The problem is that banks need to maintain a
debt/equity ratio below 12 to 1.  If they lose a dollar of real
equity, they have 11 dollars less to lend.  A lot of their equity is
in things like securities that are backed by mortgages.  As the market
value of these securities drop, banks lose equity and really lose
lending power.  They panicked and tried to sell them off, and the
price plummeted further.  At this point there are a lot of mortgage
backed securities selling for a song whose fundamentals are sound -
they will be worth a lot more than their current market value.  Yes,
there is toxic waste out there as well, but there is a lot of good
stuff too.  But there is no large participant in the market who can
afford to buy and hold them to maturity.  And there are a number who
desperately want to get rid of what they have.  So the market value is
out of whack with the fundamentals.  And as it goes down, we lose
lending power, fast.

The result is the credit crisis.  Right now it is mildly entertaining.
 How big a failure can we survive next?  But every failure makes
Christmas softer, and after a soft Christmas when companies discover
that they need loans to make short term operating expenses..and can't
get it.  The mass layoffs that you hear about?  They are real.  They
will hit main St in the first half of next year.

The bailout would solve this by making the government into the large
investor the market needs that can afford to buy and hold and receive
a profit.  If Paulson did it correctly, he could buy $700 billion in
bonds at above market price.  There is a good chance that the market
in those bonds would recover since the fundamentals for a lot of them
really are better than the current market price.  After that the
government would have the choice of selling those bonds back into the
market for a profit, or of holding them to maturity for a profit.
Either way the recovery of the market would improve the debt/equity
ratio at banks, opening them back up for lending.

Cheers,
Ben