Sunday, March 23, 2008

Wall St. Begs for a bailout

The bailout chatter continues and seems to be the new battle cry from Wall St. Bloomberg ran another piece on this tonight quoting some of the biggest names on Wall St. It seems that the sentiment of the street has gone from "We need more Fed rate cuts!" to "Bail us out! We see no other alternative that works!".

Some of the quotes from Bill Gross and others from the article:

"The only tool left may be for the Fed to help facilitate a Resolution Trust Corp.-type agency that would buy bonds backed by home loans, said Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co. While purchasing the some of the $6 trillion mortgage securities outstanding would take problem debt off the balance sheets of banks and alleviate the cause of the credit crunch, it would put taxpayers at risk.

``An RTC-type structure is interesting, and it may not be that much of a burden on taxpayers in the long run,'' said Barr Segal, a managing director at Los Angeles-based TCW Group Inc. who helps oversee $80 billion in fixed-income assets. The government should purchase the mortgages and reissue ``debt that's backed by the U.S. government and there you go, you've unclogged the drain,'' he said."

A March 13 proposal by Senator Christopher Dodd and Congressman Barney Frank that the Federal Housing Administration insure refinanced mortgages after lenders reduce the loan principal to make payments more affordable to homeowners ``is the next step,'' Senator Charles Schumer, a New York Democrat, said in a Bloomberg Television interview on March 19. It's a ``broader step, but not as broad as RTC,'' he said.

Pimco's Gross that's not enough. ``If Washington gets off its high `moral hazard' horse and moves to support housing prices, investors will return in a rush,'' he wrote in a note to investors published Feb. 26. Gross, who runs the $122 billion Total Return Fund from Newport Beach, California, didn't return calls seeking additional comment.

A few observations:

The problem we have here is this is a 6 trillion dollar problem. Wall St. wants only the bad assets bought. Well as prime loans and Alt-A loans continue to fail, who is to say that all $6 trillion of these mortgage securities will not end up being in trouble? Having the government buying this garbage is a huge risk to taxpayers if this bubble pops as badly as I expect it to.

The second question I raise is can the government even afford to do this in the first place? I say there is no way when the Fed has $800 billion in reserves which is now down to $500 billion after spending $300 billion trying to clean up this mess.

My final point is highlighted in the last paragraph. Bill Gross makes the statement that investors will be back in a rush if Washington supports housing prices. I say bull****. Why would all of these investors rush back into housing whem many of these speculators got burned BADLY? Where are the families that are going be able to afford houses at these insanely unaffordable prices?? Who are all of these investors that will be beating down the door to get back into flipping??

Bill Gross is one smart cookie and it seems more and more apparent that the great minds on Wall St. are trying to get bailed out in order to save their own asses versus trying to fix the problems of the financial system. Having Washington buy this debt helps Wall St. not the average American. Its obvious to me that Wall St. now realizes they can't fix this problem through rate cuts. They got in too deep and they are now trying to play the bailout card.

I love how quickly they try to dismiss senator Dodds proposal of lowering the loan amount to an affordable level. God forbid Wall St. takes a loss on a loan.

If you want to fix this crisis its pretty simple. Leave it alone and let the free market work it out on its own. Use the resources of the Fed to keep the markets orderly as the system resets. The companies that took too many risks will go under and the strong ones like JP Morgan will pick up the pieces. We then go into a prolonged recession where equites will fall back and we will lick our wounds and then start a new business cycle built on trust and transparency. The market will then start moving higher. Its time for Wall St. to be taught a lesson and I hope the government gets out of bailout mode. We will see how this plays out.


Anonymous said...

Amen! Let the ones that floated this toxic crap take the loss on it! A Government bailout would probably total kill Main Street USA, while Wall Street would take their ill gotten gains and invest them in commodities and overseas, which would just further exacerbate the problems on Main Street.

Jeff said...


I totally agree. This bailout would freeze the whole financial system and Wall St. gets to keep their fortunes.

they created this fraudulent housing ponzi scam and they should take the losses on it!!

Anonymous said...

Couldn't agree more! If left alone, the market will correct the bloated house prices; in fact, it's already in the process of doing so. And the mortgage industry will correct itself, as long as it isn't given a free pass.

Jeff said...

anon 9:25

It should be interesting to see the Case/Shiller index thats released on tues. to see what happened to housing prices in Jan.

Hopefully the gov't will stay out of this but history shows they love to be involved. I agree though let the markets fix themselves.