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HOW WILL BAIL-OUT WORK
How Will the Bailout Work? No One Actually Knows. By Albert Bozzo CNBC 24 Sept 2008
If taxpayers are having trouble understanding the Bush administration’s Wall Street rescue plan, they might want to think of it in terms of some popular TV shows: "Who’s the Boss?" "Deal or No Deal" and "Jeopardy.
Though Congress has expressed legitimate concern about adequate oversight and transparency, the bigger questions may be about concept and execution—or how the game is played—as it concerns management, assets and pricing. .........
Who’s the Boss?
Neither the Treasury nor the Federal Reserve is an appropriate choice.
At one time, Freddie Mac and Fannie Mae might have been, but those organizations been discredited in the credit crunch crisis. ..........
Though there's been some talk about the FDIC, Treasury Secretary Henry Paulson seems to be counting on “really good asset managers,” as he called them during his Congressional testimony Monday, under the supervision of the Treasury, which will have “full discretion over the management of the assets,” according to the outline released over the weekend. .........
"Deal or No Deal"
Though there’s been general acceptance of the reverse auction mode, there are many doubts about an effective pricing of assets.“The question is: Is this going to be an asking process or a telling process?” says Scott Rothbort, president of LakeView Asset Management. ............
“You're not guaranteed the government is going to take it,” adds Seelig, who’s now with the International Money Fund. Pollock, who was president of the Home Loan Bank of Chicago for more than a decade, says the government needs to say it’s “only going to buy the cheapest one, [those] at the best price.” Presumably that’s preferable to what’s happening in the private sector with vulture investors.
"Jeopardy"
There also remains considerable question about the mix of assets involved in the auction, which will affect both their management and resolution. Both the FDIC and RTC wrestled with that in the S&L bailout, says Seelig “A lot depends on the types of assets you have,” says Selling. “You can take mortgages and turn them over to a mortgage service, get them into shape, clean up the documentation, so you could sell them,” partly because you have the underlying value of the real estate......
but the FDIC had “trouble” moving “large commercial, non-performing loans,” such as some of assets of Continental Illinois, the big bank failure of the time.......
“What can anyone do that holds those securities?” Doug Dachille of First Principles Capital Management said in his appearance as a CNBC contributor Wednesday. “There's hundreds of thousands of little pieces of these securities. You don't know the borrower…What is the government really going to do then hold these to maturity?” .......
Paulson’s plan seems to anticipate that possibility by seeking authority to hold the assets as long as it likes.......
“I think they want it to age a little bit,” says Rothbort, who's also a professor at Seton Hall’s Stillman School of Business. “and show that it is worth more than people think. Otherwise, it's back to one big guessing game.”
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