Wednesday, September 24, 2008

Dropping the MOAB

An argument in favor of the Mother Of All Bailouts:

Just now, Chairman Ben Bernanke said "This is a matter for psychology."

I was a Psych major, and a pro trader. I can speak to this.

We should talk about the crisis of confidence at work here; that too often gets lost in the noise. Ultimately, there's no "real" price for anything. Not even gold.

Treasury Secretary Hank Paulson wants $700 billion - a number that says "The government is going to take this entire problem down, all at once."

If you do it $150 billion at a time, the Treasury will end up with more than $700 billion on its books. $700 billion is intended to get guys like Warren Buffett to step in - guys who'll be thinking, "No sense letting the government sop up the excess returns generated by holding these things to maturity; I'll buy them myself, before the morons from Treasury get here."Minyanville's Why Wall Street Will Never Be the Same

$700 billion is a bazooka. If you arm your Treasury Secretary at all, you give him a bazooka, rather than a BB gun, precisely because you don't want him to have to shoot.

A BB gun invites invasion. A bazooka makes a point. I'm not in favor of government intervention at this point, but, if it's going to happen, it should happen big. That $700 billion was shooting for a comprehensive solution.

For the people selling, the difference between Congress going for the whole megillah or doing it in tranches is this: In tranches, every block that gets used up makes it less likely that another one is coming (because you gotta go back to Congress to beg some more). In effect, the government would eliminate a certain block of toxic assets but, in so doing, would make the rest of the group even more toxic (and therefore less likely to be backstopped by the government, and still untouchably by private hands).

If the government lays out all $700 billion, the last asset sold should, in theory, be at the same price or more expensive than the first. The illusion of the "holdouts" rising in value will, in theory, inspire private equity to get on board.

If the government does this in tranches, there will be literally no end to the outflow. If they do it in one, enormous, statement-making block, it's possible the system will start running again.

Either one hurts, but these are your choices, as a taxpayer: Do you want to get shot by a BB gun 10,000 times, or once by a bazooka? Now consider the same choice - but with the possibility that choosing the bazooka means there's a remote chance you won't get shot at all.

It would seem "Letting the Actual Criminals Get Shot" isn't a choice anymore. That being the case, I'll take the bazooka - and hope that I'll get lucky and escape being blasted at all.

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