It is difficult to stand by watching the American financial system pass through a period of upheaval not seen or even approached since the great depression and not continue to comment. So here goes.
First off, they have grabbed the bull by the horns and stepped up to truly backstop the banking system itself.
Bad loans or paper will be swallowed, restoring the banks’s ability to lend to their good customers. And yes their owners will be getting a haircut as demonstrated by the haircut handed AIG. It is even conceivable that this portfolio now been acquired by the Federal Government will be unwound very successfully, although it is likely too much to ask for a profit. It could happen though that a rejuvenated AIG could quickly regain value on the market.
This is after all a lot about a collapse in confidence triggered by a shift in mortgage portfolios form an 8% exposure to the present 22%. Boy was that dumb!
The result of course is that a trillion dollars at least have been lost beyond recovery by these lenders. And let us understand this. The money is already in the economy beyond the reach of the lenders in any way.
Therefore when the fed pays out a trillion dollars to bail out the obviously reckless lenders, they are actually preventing these lenders from contracting their portfolios by forcing the liquidation of their good business which is actually impossible as was so brilliantly demonstrated during the depression.
And yes it is going to work. The only improvement to what they are doing would be to follow my mark to market strategy in order to salvage as much individual credit as possible to keep folks from walking away. The banks themselves would be well advised to apply this method since they have the regional footprint necessary.
The result would be a swifter recovery.
After this very sobering event, the real estate market will be good business for a generation as prices consolidate and recover
They are also confronting the problem of short selling. I do not take it too seriously but perhaps some good may come out of that.
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