Is it just me but doesn't this whole bailout thing resemble a multi-trillion dollar short sell?
Lets face it there are at least two hard facts we know for certain.
(In this scenario I am going to exclude the Fannie and Freddie holdings.)
- The "paid for price" of the mortgage related debt market financed by commercial outlets is nearly 7 trillion dollars.
- The "market price" of the mortgage related debt market is far less than what it was priced at.
There is another thing I think we can all agree on, and that is that this $700 billion figure is nothing more than a revolving credit line.
So lets pretend we are entering into one of these future transactions that the $700 billion credit line is going to be used for.
And lets pretend that the 7 trillion price paid is actually worth 65% of that, and that is a very conservative estimate of the actual worth of those assets. So that's 7 trillion dollars that is actually worth $4.55 leaving $2.45 trillion dollars to be washed out.
Lets do a transaction after the fold and see how it all washes out.
I'm a foreign central bank that owns $500 billion dollars worth of mortgage related debt that is essentially worth $325 billion dollars.
I can likely sell it on the open market for $325 billion or perhaps something even less. But I'm a foreign central bank and it is just plain BS if anyone in the world actually thinks I'm going to take a $175 billion dollar loss. That would be a huge loss and would put the solvency of my central bank at risk.
So what is going to happen is the treasury is going to pay me $500 billion dollars for $325 billion worth of mortgage related debt.
So now the revolving credit line of $700 billion dollars has less than $200 billion dollars of credit available and the next foreign central bank is now standing in line to rid itself of $400 billion dollars of debt that is worth $260 billion.
What do I do?
Well I could sell the original $325 billion dollars back to the first foreign central bank in addition to $175 billion dollars worth of treasuries, clearing my revolving credit line so that I can purchase the $400 billion dollars worth of mortgage debt that belongs to the second central bank.
Lather rinse and repeat until the total amount of debt that has been laundered onto the back of the taxpayer is $2.45 trillion dollars.
However, that ain't all folks. Anyone looking at this scenario can easily see that there is no reason for any foreign central bank to actually pay what those assets are essentially worth. You see, what I have effectively done is place the buyers in control of both the supply and demand side of the house for both old and new debt.
You see I can just offer up $200 billion dollars for the original debt that I owed and instead purchase $300 billion dollars of treasuries, which would leave me essentially with the same holdings I had before in mortgage related debt and $300 billion in treasuries while the US taxpayer has now had $300 billion added to his bill. Because I can literally control how much is available in the revolving credit line at any one time, I can basically as I said, control the supply and demand side of the house.
Nice little scheme eh?
And of course this does not even include the commercial financial institution's which can broker all of this and profit at the same time. In that scenario they arrange to sell that original debt for what it was priced at, then repurchase it it from the government at 45 cents on the dollar and sell it back to the original investors for 55 cents on the dollar.
So using the above, $500 billion paid by the treasury, $225 billion purchased by Goldman Sachs, $275 sold by Goldman Sachs.
$50 billion profit Goldman.
$50 billion profit investors + investors have original holdings.
$225 billion goes on the taxpayers tab.
Now as I read it, that was how Paulson's original plan is designed to work in essence and it amounts to a multi-trillion dollar short sell that could easily leave between $2.45 and $3.5 trillion dollars on the taxpayer tab. I have not really seen all the details of Dodds plan, but somewhere in the middle we are somewhat protected by getting an equity stake as I understand it from a high level.
Anyone else see it differently and have a different take. This is the crux of what Krugman was talking about when he said he could not see how this plan raised any capital unless we paid more for those assets than they were worth, however I don't think anyone has discussed the possibility that the original owners of this debt will get it right back after the losses have been washed out onto the backs of the taxpayers. I suppose I should say losses and profits because if we took Paulsons plan as it is that is exactly what I see happening.
And of course this does not include any other debt instrument or debt category aside from mortgage related debt, which could easily add trillions to this scheme.
Anyone else?
And just for fun, lets consider it is now the middle of October, this bill has passed and Paulson has bought up $500 billion dollars worth of mortgage related debt and the trade deficit has come in at $65 billion dollars and our foreign creditors now have an additional $65 billion buckaroos to recycle back into the American economy.
So what will they do with all that cash, and the $65 billion that comes the next month and the one after and so on?