Here’s an interesting bailout overview.
Based on the underlying fundamentals (like the current foreclosure rate and the one forecast for the future), many of the securities appear to be worth something on the order of 75 percent of their original value. But thanks to the fear now gripping the market — not necessarily an irrational fear, given that most forecasts have proven far too sunny over the last year — very, very few of those securities are trading hands. Among those that have, the sales price has been roughly 25 percent of the value.
Which price is the government going to pay? As Mr. Colander puts it, that’s where the action is.
It clearly shouldn’t pay 75 cents on the dollar, or anything close to it. That would mean the Treasury Department — which, in the end, is really you and me — was assuming nearly all the risk. But it probably can’t pay 25 cents. That might fail to fix the credit markets, because it would do relatively little to improve financial firms’ balance sheets. Firms might then remain unwilling to lend money to businesses and households, which is the whole problem the bailout is meant to solve.
http://justoneminute.typepad.com/main/2008/09/bailout-overvie.html
The Dodd proposal is detailed but absurd.
and more here.
The heavy use of the plumbing metaphor almost makes one picture Paulson with his pants riding down a couple inches, leaning over a financial toilet bowl. It is clogged with unwanted securities backed by mortgages, supposedly because the sellers cannot find any buyers.
However, the market could be clogged because the prospects for a bailout are destroying the motivation to sell mortgage securities. If you sell this week and take a big loss, you will look pretty stupid if there is a bailout next week where comparable securities fetch much higher prices.
http://pajamasmedia.com/blog/an-alternative-to-the-wall-street-bailout/
