Imagine the following scenario: the Dodd plan is adopted, Paulson and Bernanke overpay for the assets and early in Obama's administration they sell the assets at a loss and take over the banks (all the existing equity gets wiped out and Tresury owns 100% of the assets). A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
The US Government has already taken charge of Freddie and Fanny. The portion of performing loans in their portfolios is not yet public knowledge. The location of the bottom for real estate prices is not known yet. It is possible that prices in some of the largest markets have another 20% drop ahead. It is not inconceivable that they could be $1 to $2 Trillion underwater by the time the bottom is reached. Who knows the extent of liability due to leverage on CDOs and MBSs which they own or which they have already guaranteed? May they be small to non-existent!
AIG could be in the same range of damage potential due to a larger portion of their obligations being leveraged. Even $40 Billion leveraged at 30 to 1 gives $1.2 Trillion. Then there are all of the banks lined up at the FDIC's door. Even if they end up only 10% under water on the typical 60% of their assets which are mortgages, could that total another $1 Trillion?
It seems to me to be far more responsible to insure that any more expenditures go towards efforts where the size and extent of the damage is well defined. That should start with a cold eye on the books of the Fed. If indeed, as Jerome's correspondent suggests, most of the demanded $700 Billion goes just to re-capitalizing the Fed, then that is just pissing into a hurricane unless the Fed is ordered to cease and desist in its policies of buying toxic trash for good money, as Market trustee suggested? How can we know the adequacy of the proposed solution if we don't know the size of the problem?
I can see that it is possible that the mortgage problem can be worked out over time. I do not see how leveraged financial instruments can be saved unless they miraculously save them selves by all netting out to zero. I fear they might be several Trillion dollars off. And that is in today's dollars. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
