Posts Tagged ‘bailout’

Understanding the Bailout… I think

September 23, 2008

Consumer mortgages sat on a wall. Consumer  mortgages had a great fall. All the kings accountants and all the kings friends, couldn’t put Consumer mortgages back together again… or can they ?

After watching all the testimony on CNBC and Fox Business (and a little Bloomberg too), there was one comment from Hank Paulson that really clarified things for me. Or at least I think it did.

He said the process of the bailout was going to take place, asset class by asset class. Combine this with other testimony that talked about the important of getting participation from all banks, rather than dealing on a bank by bank basis, here is what I think I can conclude:

Every which kind of debt, from mortgages, to parts of mortgages, to corporate bonds to IOUs from your Uncle Fester have been packaged together in every possible permutation to create sell able assets that could then be used to package CDOs , CDSs to who knows what. Every investment bank then took these complex instruments and made a boat load of money selling them to anyone who would take them, including each other. Every one did it because everyone did it and they were making a ton of money from it.

Problem was, these products were  complex, and, and its a VERY BIG AND, there was no real accounting of what products were sold, how many were sold, and what was in the products, individually and in aggregate.  Bialystock & Bloom could have done a better job accounting for this than what exists today. Which is basically no accounting for all of this at all. None.

Because there is no transparency or centralized documentation of what the financial institutions have sold, what they own, or what the pieces involved are, the Fed really has no idea whatsoever what it is buying.

So what to do ? Exactly what Paulson is doing. You tell everyone to throw their junk into a big hole and then you send in the accountants and “experts” to untangle everything and put them in their “asset class bucket”

Figuratively, imagine a huge trash pile of contracts reaching to the sky. Some government accountant is going to start with the one at the top and start reading it to figure out what the hell is in each contract. Then they are going to extract the pieces and put them in asset class buckets. It will go something like this…:

This contract has 10k pieces of mortgages, so we are going to document which mortgages and put them in the mortgage bucket. This one is a CDS against XYZ corporation , put it in the corporate debt asset bucket for XYZ corporation.  There is a bucket for each asset or debt class, mortgages, corporate and whatever else is possible.

Once they have deconstructed each contract into the lowest common denominator asset class bucket, they will start to reconstruct, if not each individual mortgage, packages of mortgages and how they are encumbered. They will construct each individual debt obligation and all the instruments that have been sold against that debt. They will do this over and over again, documenting all of it until they can come up with an accounting of what assets, debts and derivative instruments they actually have bought

Once they have done this, they can start the process of selling what they hope will be far simpler and easier to understand and document financial instruments. Which, by nature of the fact that they are simpler, will be easier to sell at a higher price.

One of the challenges they have is in having all the contracts required to identify all the pieces of the base asset class. To simplify, if a mortgage was split up into 100 pieces and they only were able to identify 90 of them, it will be harder to sell the underlying mortgage because its missing pieces. this is exactly why Paulson said that they are not going to punish each individual corporation and CEO.  They dont want to disincent any holder from contributing every bit of these obligations. They need to find everything in order to put the pieces back together. They need full participation.

Once they identify all the pieces, then they can start selling all the pieces, asset class by asset class.

Once they get to this point, then I stand by my last post. They need 100pct transparency. They need to identify all the final products they were able to reassemble and all the pieces that the final products were assembled from, along with the companies they came from.  Then they need to publicly list all these and create some form of auction market exchange from their sale.

if they can sell it, it means they have it documented. if its documented for the buyer, it can be documented for shareholders of USA Inc, you and I, to see and for private equity to possibly bid more and buy

And finally, they need to work with Congress to pass a law that revokes the Golden Parachutes of any officer of a company that contributed assets to the Bailout.

This is how I understand this whole thing. Tell me what I missed or where I am wrong