FED/Treasury to create Temp Clearing house LITE

[icm63]

This is the way I read the proposed fix from Hank and Ben. LINK

At issue is a proposal to create a new government entity that could take bad assets off of banks' and financial firms' balance sheets and sell them at auction, according to published reports.

The online edition of The Wall Street Journal, citing unnamed sources, reported that Treasury officials have been studying the creation of such an entity for weeks, "but have been reluctant to ask Congress for such authority unless they were certain it could get approved."

The Journal reported that the entity would not mirror the Resolution Trust Corp., which was created to address the savings and loan crisis in the 1980s. Rather than hold and sell the assets of failed banks as the RTC did, the new entity would "purchase assets at a steep discount from solvent financial institutions and then eventually sell them back into the market" through an auction, the Journal reported.

So a govt clearing house or derivative exchange

- Create a Govt controlled entity
- Buy illiquid assest at deep discount (the major debate will be the price)
- Auction them back to the market at best prices

So the PRICE they buy the assets at DEEP discount must mean a huge hit for the bank having the assets taken off their balance sheet. This means a loss is still a loss. But the loss for the bank is hoped to be the full and final loss of this bear cycle, I assume.

So (say) BAC sells its assets for $0.20 cents in the dollar to the govt entity and they hope to sell them for more or less. Who takes the profits or losses if the auction does not go well ???

Losses are still losses, and if the buyer buys this paper and it falls further, I guess more losses via the govt clearing house ???

[Tulpen]

Re: FED/Treasury to create Temp Clearing house LITE

T-o-t-a-l - I-n-s-a-n-i-t-y!

What of course is going to happen is that the banks are going to be able to offload their crap above market to the government and other banks are going to buy back that crap below market. Good for the banks, more profits. :rolleyes:

After this, financial institutions can go ahead and sell as many out of the money puts on the complete market and "insure" all distressed financial institutions against default (can we get the government to pay for that as well?) since they would never have to pay because they know now the government will bail them out anyway.

Someone real soon is going to ring the bell and that moment will happen when the US government is no longer seen as AAA rated by foreigners.

[icm63]

Re: FED/Treasury to create Temp Clearing house LITE

I assume my understanding is correct.

GCH = Govt clearing house.

Lets Say Wachovia have $100 of level 3 assets valued at $0.30c in their last 10g report.

They sell this to Govt (after tough negotiations) for $0.25c and take a loss on this immediately of $0.05c.

This paper is sold at auction via GCH for $0.10c, the GCH takes a loss of $0.15c ( ouch ! Taxpayer down $0.15c)

Surely the next time the Govt buys similar paper they would NOT pay more than 15c, surely, wouldnt you think ???

So if your first to sell to GCH you may get the best prices !!!

[icm63]

Re: FED/Treasury to create Temp Clearing house LITE

Further...

I understand that the reason why this setup failed in Japan in the early 1990s, is the initial price to the clearing house could never be agreed.

And once the paper starts being sold a auction at very low prices, how can the Govt buy NEW Level 3 paper higher than recent auction prices.

So unless all LEVEL 3 assets are sold all at exactly the same time to the clearing house, ...... all I see is trouble !!

Cramer said set the value at $0.30c, yet banks have already written the stuff at lower than $0.20c... ( eg WestPac in Aussie)

[icm63]

Re: FED/Treasury to create Temp Clearing house LITE

Starting balance looks higher than $500 bn...

here: http://www.bloomberg.com/apps/news?p...YmE&refer=home

Citigroup Inc., JPMorgan, Bank of America Corp., Goldman Sachs Group Inc., Merrill Lynch & Co. and Lehman Brothers alone had more than $500 billion of so-called Level 3 assets as of June 30, according to data in a Sept. 15 report from New York-based bond research firm CreditSights Inc. The holders of these assets say their values can only be determined through internal models because of illiquid markets.

I bet, this is sold to Govt Clearing for $500 BN, either held for years or sold for $0.10 in the dollar back to the bank that created it.

Jes wayne, some one is winning out of this !!!

[Tulpen]

Re: FED/Treasury to create Temp Clearing house LITE

Jes wayne, some one is winning out of this !!!

And the children of that winner will probably be the future presidential candidates of the USA.

[icm63]

Re: FED/Treasury to create Temp Clearing house LITE

HERE

However this new entity would be very different from the RTC in a number of ways. The RTC was created to dispose of assets accumulated from failed Savings & Loans.

The new entity, according to the WSJ, would purchase illiquid assets "at a steep discount from solvent financial institutions and then eventually sell them back into the market".

With the RTC, the government already had direct responsibility for the assets since they acquired them from insured S&Ls that had failed. The role of the RTC was to liquidate certain of these assets.

In the current situation, the government has no financial responsibility for the assets, except for a few exceptions like the assets of Fannie and Freddie, and the NY Fed's assets acquired in the JPMorgan / Bear Stearns deal. The new entity will both buy assets "at a steep discount" and eventually sell the assets. So unlike the RTC, this new entity puts the taxpayers at risk.

Details of how this will work aren't available yet. But one of the key problems - in addition to the risk to the taxpayer - is that this program will actually reduce regulatory capital as losses are realized. The opposite of the goal!

There all mad....LOSSES ARE LOSSES, why is the market up...stupid !

[olivegreen]

Re: FED/Treasury to create Temp Clearing house LITE

Now for some reason my feeble mind wants to understand this, so forgive me here as I'm really only just learning things. As I understand this, the government is creating an entity which will buy "garbage stuff assets" from troubled banks at say $30. The troubled banks will take a hit for no longer having these "garbage stuff assets" but will be free of them on their books, (probably meaning they can get upgraded as wonderfully safe places by rating agencies that have failed miserably to judge such things already.) Then... this new entity takes the $30 assets and puts them out to auction. Now if they only make $10, they are then putting the taxpayer on the hook for the $20 loss? If they make $40 who gets the profit? This is provided they can find buyers? And if I'm reading this correctly as per Tulpen, the likely buyers will be other banks who will have sold it for $30 originally and bought it back at $10...

Now... they are banning temporarily something called short-selling... As I understand it, shortselling is loosely (in my head) defined as betting (and hopefully profiting) that something will go down in value... apparently a very unpatriotic thing to do...

Now... tell me, how is what this new entity is doing for the banks any different really than short-selling by the banks? And how in hell is a tax-payer supposed to accept this as some kind of solution? And where is all this money to create all these things coming from?

I'm very confused...

OG

[jtabeb]

Re: FED/Treasury to create Temp Clearing house LITE

So if your first to sell to GCH you may get the best prices !!!

Don't assume, the phrase "case-by-case basis" comes to mind.

[jtabeb]

Re: FED/Treasury to create Temp Clearing house LITE

Further...

I understand that the reason why this setup failed in Japan in the early 1990s, is the initial price to the clearing house could never be agreed.

And once the paper starts being sold a auction at very low prices, how can the Govt buy NEW Level 3 paper higher than recent auction prices.

So unless all LEVEL 3 assets are sold all at exactly the same time to the clearing house, ...... all I see is trouble !!

Cramer said set the value at $0.30c, yet banks have already written the stuff at lower than $0.20c... ( eg WestPac in Aussie)

No, NO NO! You have it all wrong. The BUYING will all be done first, THEN the sales will take place (not before all the buying is completed, ok?).

BTW This allows for higher and higher prices of distressed debt as the buying progresses, not lower and lower prices (less trash available means trash goes up not down in price. supply/demand). The lower and lower prices part only comes into play during the sales process and by that time the entire book will be in the hands of the tax-payers, I mean government clearing house, get-it?

Remember:

higher and higher prices for debt as the government buys it all up. (the most distressed firms sell FIRST, at the lowest prices. The sweetheart deal firms that help the fed out by taking all these "bad" deals, sell LAST at the highest PRICE. Then the Government REALIZES the losses at the market auction (lower and lower prices during subsequent sales).

Lower and Lower prices realized at auction when the government sells (bigger and bigger losses for taxpayers).

That's how it's going to work.

[icm63]

Re: FED/Treasury to create Temp Clearing house LITE

BY olivegreen ..."I'm very confused..."..

ME : Yes thats about correct... Taxpayer will be a big loser !

BY jtabeb .."higher and higher prices for debt as the government buys it all up.Lower and Lower prices realized at auction when the government sells (bigger and bigger losses for taxpayers)."...

ME: Thats even worse, I wonder if PIMCO likes this idea ? How can congress take this, are they that stupid or scared !!!

[jtabeb]

Re: FED/Treasury to create Temp Clearing house LITE

BY olivegreen ..."I'm very confused..."..

ME : Yes thats about correct... Taxpayer will be a big loser !

BY jtabeb .."higher and higher prices for debt as the government buys it all up.Lower and Lower prices realized at auction when the government sells (bigger and bigger losses for taxpayers)."...

ME: Thats even worse, I wonder if PIMCO likes this idea ? How can congress take this, are they that stupid or scared !!!

In the military we have a saying "******* PUSSIES!"

[c1ue]

Re: FED/Treasury to create Temp Clearing house LITE

Gentlemen,

Seems pretty straightforward to me:

Government buys security at 'fair market value': 20 or 30 cents on the dollar.

Security declines further.

Taxpayer makes up difference.

Voila! Bad debt destroyed!

[ASH]

Re: FED/Treasury to create Temp Clearing house LITE

Gentlemen,

Seems pretty straightforward to me:

Government buys security at 'fair market value': 20 or 30 cents on the dollar.

Security declines further.

Taxpayer makes up difference.

Voila! Bad debt destroyed!

Ya. I agree with C1ue.

If you believe in ka-poom, then this is exactly what is necessary for poom to happen.

There seems to be some cognitive dissonance amongst the iTulip set. On the one hand, some of us are decrying government bail-outs, and are complaining bitterly about the contortions required to keep "the system" going. I understand the outrage from a moral perspective, but if you've been reading iTulip and think EJ might be onto something with the whole ka-poom thing, then massive government bailouts that prevent a deflationary collapse are precisely what is expected. These are the type of policies the EJ said the government would invent, and they should lead to the outcome that EJ said was coming. To the extent that one's investments are aligned to the ka-poom thesis, then one should be gladdened by these developments (in a financial sense).

[icm63]

Re: FED/Treasury to create Temp Clearing house LITE

The last time the INDU had this large two day rally, was 1929...Thats the environment we are in.

Ka poom, will be after the crash. Once they realise that $500 BN is not enough !

Picture
down_85_from_the_peak.png