No question the bailout is necessary. We need the liquidity. But just like Botox, the impact of the Bailout will wear off very quickly. Its lipstick on bank balance sheets. The biggest mistake any taxpayer, shareholder or employee can make is to the think the Bailout solves the crisis. It doesn’t.
So Post Bailout what has really changed ?
1. Are there new limitations on debt leverage ratios ? No. The big investment banks are gone, but there are plenty of smaller ones ready and happy to take their place. Which is exactly where all the big brains of GS, AIG and Morgan Stanley will go
2. Will the economy improve ? No. The Bailout hopefully saved the economy from collapse, it didn’t improve any fundamentals. The bankers who got us into this mess got a reprieve and a few of their jobs saved. The Bailout didn’t make them any smarter. Taxpayers with good or better credit will have a chance to get loans. Same for businesses. Everyone else, the people who overspent their earnings and propelled the housing and retail economy the past several years, will not be able to refinance and will have to…….spend no more than what they can afford to pay off on their credit cards. Which means the economy will contract to a smaller level and then start to grow again as people are able to save money and then spend those savings.
If people actually do save money, the contraction will be tough, but it will be shorter . This is still the USA and once people see money in their savings accounts (however and wherever they are held), they wont be able to resist the hole that is being burned in their pockets.
3. Are there any limits on credit or other derivatives products ?Hell No. All the fancy financial instruments that caused AIG and others to go belly up or get bought are still unregulated. Unregulated and ready to be bought and sold by everyone who bought and sold them before. Do you really think those people are going to be willing to make less money in 2009/10 and beyond than they did last year because of what the world financial system is going through now ? Hell no.
They will invent new versions of the same instruments that supposedly avoid the pitfalls of the previous generations that got us into this mess. They will attract huge amounts of cash and without regulation, the “Next AIG” will overleverage, the system will deleverage and we will have Deja Financial Vu all over again.
Remember this. The 1.25 Trillion Dollars plus lost in this crisis, IS MORE THAN THE HAS BEEN MADE IN THE ENTIRE HISTORY OF BANKING . Worse yet, its not the first time they have lost everything they have made in the history of banking.
4.There is a new sucker at the Table. One of my favorite sayings is that when you sit at the table to do a business deal, you look for the sucker. If you don’t see the sucker, its you. Well there is a new sucker at the business table, The US Government. There will be an untold number of vulture deals put together to leverage the anxiety of politicians who want to prove the Bailout can make a profit and quickly get taxpayer money back. Don’t be shocked to see the XY Morgan BailOut Opportunity Fund being sold in commercials on CNBC and Fox Business Network.
5. Transparency ? So how will we know how the assets purchased by the BailOut are doing ? We won’t. We will be told by our politicians how they are doing. Which means they will spin numbers they don’t understand into soundbites they hope will get them elected. Unless we move the purchased assets and the resulting transactions they create into a fully transparent fund that trades on a major exchange, we will NEVER know how well the assets have done. They will go into the general budget and be lost in the sauce.
Just try to understand the national debt and the accounting behind it and you will see how impossible it will be to track the success or failure of the Bailout.
Putting the assets into an ETF, as I suggested in my last post, will allow every taxpayer to see just how the assets are performing on a tick by tick basis, just as we follow the performance of any stock or fund we own. Because an ETF allows for the exchange of assets with Shareholders, it will also insure that the assets are managed properly. In addition, because the shares owned by the US Treasury can be sold into a liquid market, the money “invested” in to these assets could be returned far more quickly.
How would it work ? The Treasury would buy the assets , apparently 250B to get started, and put those assets and the costs to manage them into the ETF. It would then issue 250B of shares, probably 2.5B shares at $100 each to themselves.
They would then immediately begin to sell shares to the market. So people like me, you , institutions, anyone who thought that this is a good deal, could buy the shares initially at $100 ea. From this initial offering, the market would take over. If investors thought the assets were being well managed, the price would go up. If not, it would go down.
If demand was strong enough for the shares, and the price went up, the Treasury could issue more of the shares they own into the market, there by IMMEDIATELY REDUCING THE COST TO TAXPAYERS.
As a frame of reference, the marketcap of the fund, based on a 250B initial bailout, would of course be $250B dollars to start, which just happens to be the same marketcaps as MicroSoft and the same marketcap as General Electric. So this is far from being too big for the market to handle.
I promise you, this would work far better than the current plan to keep the assets behind the veil of the government, with no transparency beyond the listing of transactions and assets on government website.
6. Wall Street Will be a Barometer of the Bailout: No Longer. Far too many of our politicians think that the Stock Market, in particular, the Dow Jones is and will be a good barometer of how smart the Bailout is and how well it will do. WRONG. There has been this big push to get the Bailout done before markets open. They lost all that sleep for nothing.
The minute the SEC suspended short selling on the 900 or so stocks they wanted to protect, they killed the value of the Dow as an index on the economy and the success of the Bailout. We saw a big selloff last week as short sellers and hedges conformed to the new rules and adjusted their portfolios. Since that point, we no longer have an efficient market. Short Sellers keep optimism in check. The lack of short sellers mean that its hard for the market to be honest. We will hear more proclamations by companies that “there are no problems” and days or weeks later hear the same CEO comment that the failure of the company was “unforseeable and caused by dire market forces”. It certainly will not be a true indication of financial performance.
Short Sellers serve a very valuable service to shareholders and taxpayers. Losing that has and will make the market unstable and unreliable. Always remember that it was short sellers that uncovered Enron, and all the biggest frauds on Wall Street.
With a Bailout in place, the market will go up. There will certainly be a post bailout placebo effect. How could there not be, there are no shortsellers to keep it down. But once the momentum stalls because there is no real capital left to buy stocks, then it will start to fall. Those who bought in the runup, the momentum players, will rush to cash and out of stocks to protect their portfolios.
Where will the market be in 6 months. No idea, but my guess is that it will be lower than it is today.
When the SEC allows shorts again, and it will have to, then it will fall lower. BUt thats good news. We will be able to trust stock valuations and we all can consider buying stocks with stable dividends again.
7. Main Street Hustles: If you think there were too many “buy homes at foreclosure” and “buy cars from the government” scams before, you aint seen nothing yet. It should immediately become illegal for anyone or any company to advertise the sale of individual assets sold to non qualified investors.
8. JP Morgan seems to be buying everything, are they being watched more closely now ? Of course not. They are the winners, and to the winners goes the Wizard of Oz Curtain. This is where we all pray that the assumptions that JPM is basing their acquisitions hold true. Read this to see the assumptions they are making on their purchase. If they are materially wrong, No one will be able to bailout that failure.
JP Morgan also is already in bed with taxpayer money. The Treasury will cover up to $29B in losses from Bear Stearns assets. Has any taxpayer seen any disclosure or transparency on this ? Of course not.
JPMorgan is a company trying to integrate the asset and debt base of two HUGE failed companies, Washington Mutual and Bear Stearns. It had to raise $8B just to get their equity to assets ratio in line. It needed the Treasury to backstop 29B in Bear Assets. Don’t get me wrong, I think JPMorgan is a very good company. But so was AIG. Its not so amazing any more what execs will allow to happen on their watch to push earnings and stock prices. Make sure you ask your representatives in Congress to keep an eye on JP Morgan.
9. Will more banks fail and what should I do ? Yes. Absolutely. If you have less than 100k dollars in the bank, do nothing. You are protected by the FDIC. If you have more, ask your bank about CDARS. CDARS is a distribution service that banks participate in that allows the bank that holds your deposits to distribute them among different banks to keep each of your accounts under 100k and as a result protected by the FDIC. This is what I did for foundation accounts I have.
In addition, there is something called the Right of Offset. If you owe the bank money for any reason, business, mortgage, whatever , and the bank fails, then you can offset the money you lost in the failure against any money you owe the bank. So if you have a mortgage, call the bank and confirm that you have the right of offset and move the money you have in accounts to that bank.
Remember to make sure which accounts match which debt. Your bank can confirm what matches and explain to you how the right of offset works.
For brokerage accounts, check with your broker to see what is insured, and what is not. Ask him/her what happens if the broker or institution that you bought your funds from fails. Make sure you get it in writing/email. This will be your protection to make sure that what you hear and what he/she is saying is the same thing.
Boy…I guess it’s bailout season. Haha. I could use one, too. Where
do I sign up?
Comment by Crow's Feet -
I am not sure the bail-out as currently structures IS necessary.
Why?
Why don’t those companies in “financial crisis” have to file Bankruptcy first? I don’t get why we think that “bad” behavior will be “rewarded.”
Chapter 11 should be required first. If Chapter 11 won’t fix everything, the government can step in to “help.”
Chapter 11 would at least make sure the company in question, the creditors, the shareholders, and the executives paid MORE than the rest of us that had nothing to do with the “financial” crisis.
Yet, I have heard only one journalist (on NPR surprisingly) who said the “free market” has a way to deal with “financially-troubled” firms–Bankruptcy.
Read a nice post here http://wordpress.pocosin.com/?p=776
Comment by Counsel -
In regards to Mark’s comment on JP Morgan, I think that we are now seeing the fruits of Jamie Dimon’s aggressive acquisition streak. Their 3Q08 net income fell 84%, they incurred $3.5B in write downs, posted $416mm in losses and saw revenue fall 8.5% from last year; and this is the calm before the storm. It seems that JPM was busy writing checks without worrying if their ass could cash them. Wasn’t this type of behavior the cause for the financial crisis? If it was then why are JPM’s actions not only being condoned, but rewarded with $25B in “ne” U.S. Govt cash to continue these negligent practices. Which way to the BailOut window?
Comment by TomH -
$700 BILLION BAILOUT CAN BE WIN-WIN-WIN FOR CITIZENS, BANKERS AND CONGRESS
My Senator, Barbara Boxer, responded to an email asking her not to vote for the bailout plan without considering more options. She said the primary reason she voted YES was because she heard from California the news that without the bailout California would not be able to ‘sell voter-approved highway, school, and water bonds.’
Congress simply does not get that they not only have to do something, they have to do it right. What if there is a way to make everyone a winner?
Unfortuntely, I am old enough to recall previous decades. One recollection is of a time when all gasoline taxes went to the department of highways, both state and Federal. Before Congress moved these taxes to the general fund, my memory is we had little problems paying for infrastructure in our country. We were the world leader in expanding and improving roads. It makes me wonder why now we can’t keep California highways ahead of growth even with selling bonds.
Another memory is from the same era: when taxes collected for Social Security were earmarked only for Social Security, again, before Congress moved this money to the general fund. By correlating average U.S. salaries, cost of living, annual interest earned and cost of administration over the last thirty years, it is very clear that had Social Security money been kept out of the general fund it would today be, at worst, solvent and able to bear the increased demands placed on it by Baby Boomers. At best, assuming an investment return of 2% over prime, it would currently have an enormous surplus — enough to get us past the Baby Boomer demographic. It might be interesting for you to have someone run the numbers.
One of the reasons so many people opposed the bailout has to do with Congress, the institution. We may still have faith in our individual elected officials but Congress as a whole has provided so many examples of short sighted thinking, graft and corruption, and lack of intelligent thinking in the bills passed in teh last thirty years that the majority of Americans have a difficult time trusting the collective members currently sitting Washington.
Why not place $2,000 in every American citizen’s Social Security account (roughly $700 billion) and then loan the money to the financial institutions in trouble. Think about it.
Good luck, God bless,
Steve Peek
Comment by Steve Peek -
If you want to check out the astrological aspects of the financial meltdown, go to http://www.robertphoenix.com
Comment by rpm1122 -
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Pingback: Midday Monday Bailout Negotiations Briefing | Michael Gracie
I just read the 110-page draft of the BailOut bill. (link follows) It looks pretty good and there is even a good section on market transparency.(Sect 114) The Govt will make available to public in e-form, all the details of purchases (description/prices/from whom) and sales of all assets, within 2 days of action. They will create a Financial Stability Oversight Board(FSOB) consisting of Paulson, Bernanke, Cox, Al Jackson and Ron Rosenfeld. An independent member needs to be added to this Board; because this is the same group that watched the economy “go to shit” over the past 3 years so they cannot be fully trusted to repair it. They will also pay them extra for this service. (this should be scratched) An Inspector General of the process will be appointed to oversee efforts. (under Paulson). Reports will be sent to Congress on each $50B spent within 7 days. There is also homeowner/mortgage protection included. The bill limits exec compensation and eliminates golden parachutes for execs at companies that take the bail out funds. The FDIC will get protection under this new version which will limit bank runs. This is all good stuff for taxpayers. This should be required reading for everyone who has money in the bank and is registered to vote in November.
http://www.politico.com/pdf/PPM111_080922_treas_grim.pdf
Hank needs to move fast on buying the ‘worst’ assets to lessen market risk. The he should act just as fast to sell them. In order for confidence to be restored, the public needs to see action (quick wins) then the market will begin to pick up the slack. Any more delay could negate the reason for pursuing the BailOut to begin with.
The only major problem I see with the BailOut bill is that the FSOB can ask the President to request the other $350B from Congress at anytime. Neither Bush, McCain or Obama has the financial capacity to authorize such a distribution. So he will ultimately rely on the FSOB to make the decision for him. This is why I insist on a truly independent party to sit on the board. But who am I?
Comment by Tom -
Pingback: The bill always comes. « Retracing Steps
Goldman Sachs added more proof that the entire $700B will not be needed by announcing that they are looking for $50B in distressed bank assets to build their deposit base. Morgan Stanley will do the same now that it has $8B in fresh powder from Mitsubishi/UFJ. Also, Jamie Dimon(JPM) just found out that Citi (after Wachovia buy) has more assets/deposits under management, so he will need to up the ante. The $250B that Congress approved is enough for Hank and the Boys to calm the markets. A pricing structure is going to be developed for these bad loans/debts and the American people will remove the money from their mattresses and return it to the banks. I do not expect the other $350B to ever be used or approved by anyone in Congress.
Corporate Governance 2.0, needs to take affect immediately as these bank executives that mucked everything up, will now have more money to muck it up again. They need to start with SarBox b/c it is already in place. If Congress can improve it, they can avoid creating another regulatory obstacle for people to complain about and speed the time to marketplace.
This might offend some people but some of these smaller banks need to fail. There are now more bank branches on corners than McDonalds. (please check) Everyone and their mother started a bank during the go-go 90s and now they want to be bailed out. FDIC says that 113+ banks were in trouble in the 3Q/08 and it’s probably around 200 now. Hank needs to realistically look at 1) What the FDIC can bear then 2) Decide who fails and who survives. Save the Main Street vs. Wall Street vs. US Govt for less popular blogs. The financial industry is a tough, cut-throat business and if they could not stand the heat then they should have never entered the kitchen. Main street investors/depositors would be much better off in the long-term if they were with a larger bank. If you were a patient, would you rather 1) Get cut deep once or 2) Get slashed multiple times over the next 10 years?
Comment by Tom -
I totally agree Mark. As you know I am in banking and points 3,4,5 & 8 are spot on. Love the ideea of an ETF, Nice post.
Comment by Aussie_Dion -
As I predicted last week, US Govt forced Citi to buy Wachovia in a shotgun marriage. Again the FDIC avoided catastrophe and the American public didn’t even notice it. The trick is used by magicians to get you attention focused on something else (card trick) while they do something entirely different. (remove your watch) This time it worked. Hank Paulson/Bush knew the problem was the FDIC. They used the $700B, 3-page plan to buy time and find buyers for 1) WaMu and 2) Wachovia. Wachovia was the harder sell because it had the most crap on its books. It’s obvious if you are trying to ask Congress/American people for $700B you would not submit a 3-page plan and ask for unrestricted access and authority. They knew Congress would balk and thus giving Hank/Bush time to ‘remove the watch.’
I still that that the FDIC is too fragile to absorb any more major hits. Fortunately all the other bank failures will be relatively small. ($5B or less) Also Morgan Stanley and Goldman Sachs will need to build up their deposit base as commercial banks, so these will be easily sold. To be certain, I would add $50B to the FDIC to appease the public.
Especially since Mark gave sub-millionaires the scoop on CDARS. Thanks Mark for the public service.
To anyone who is utterly confused on the “Troubled Asset Relief Program” (T.A.R.P.) please visit Wikipedia. It’s not the gospel but it is a good primer for the less financially inclined. I don’t know who came up with this acronym but they should be fired. When someone says ‘tarp’ what image comes to your mind? Could it possibly those awful blue tarps in Louisiana and Texas? And what is a tarp designed to do? Cover things up; Not fix them. Perhaps Paulson/Bush are giving America a hint of there true plan? Let us not be fooled into thinking the $700B bailout is supposed to resole anything. They should have called it B.A.N.D.-A.I.D. (Bad Ass Negligent Decision Always include Destruction) If someone can come up with a better one please do.
To answer the question as to if Hank Paulson is going back to Wall Street: Yes. McCain does not trust him, so if McCain wins, Hank is out. Obama thinks that he has smarter people on his team, so if Obama wins, Hank is out. Also, Hank know that there is more money to be made in a depressed market then a bull market, so he will be back out there in January. He accomplished his purpose by signing on in 2005; He saved $200mm in cap gains taxes by selling all his GS shares. Now he is going to sell those Govt bonds and mutual funds and make some real money. Watch Forbes over the next few years and you will see what I am talking about.
The first moratorium on short selling ends Oct 2nd. (says UBS my prime broker) I expect it to be extended indefinitely or at least until January 20, 2009. Why? Because as soon as it is lifted, that $700B will go straight down the damn drain. Plus, other Govts around the world are going to keep their bans on shorts because whoever lifts theirs first, is the real sucker.
Transparency is nice but the US Govt will never allow it. If they did we would be able to see those torture videos on YouTube and CIA will have to reveal all its holdings. (That’s where I would put my $50mm.) We might not find out how much the Govt bought the bad loans for but, we will know what when they sell; especially the ones that sell for $1B or more. The problem is if you don’t know the first part of the equation, you don’t know whether to applaud or cry.
The FBI/DOJ should be brought in to investigate every company that we bailout. If the bankers will not give up their compensation or bonuses willingly (carrot = bailout) then prison time will be the stick.
Regarding JP Morgan, Jamie Dimon was a good banker before Sandy Weill (Citi) pissed him off. Now he has this “John Pierpont Morgan” complex which has transformed him into an acquisition monster. He has a guarantee from Hank/Bush that whatever he eats, they will help him digest, so right now he can do no wrong. I agree with Mark in saying if JPM fails, we are all….well, you get the picture.
Comment by Tom -
I say instead of bailing out the companies and speculators that MADE STUPID CHOICES, we instead payoff the bad loans that caused this, the government then owns the properties, and can either sell them, rent/lease them of setup a payback from the previous owner. Why give the dumb companies a second chance, I don’t think all those businesses that only last a year get a second chance, unless they file Chapter 13 or 11. Come on, it’s time to stop the insanity.
Comment by Cruise Control -
Pingback: theceodaily.com» Morning Update » September 29, 2008
The bailout is a joke and one of the most fundamentally UNAMERICAN things I have ever seen.
This isnt Capitalism. There are winners and losers in everygame.
AIG is a great example.. think other insurers are happy that the gov bailed out AIG?
I mean i bet you state farm was already planning on a 30 percent increase in
insurance operations !…
Comment by Note Taker -
These same people who say we need the bailout and there is no
alternative are the same people, who a few weeks ago, said all was
right with the world.
Comment by Stephen -
It won’t wear off that quickly. First of all, it takes weeks
and months to process these agreements. In the meantime, speculation
will be so positive Dow Jones is gonna jump up at least a few more
hundred. Secondly, the bailout itself is more than a bailout–the
final agreement has notes about executive pay and transparency.
HOWEVER, you are right to say that the bailout in itself is not
going to save the world. But let’s be honest. It’s a good start–
so long as we do it wisely.
As for your items…
1) I’ve never heard people asking about debt leverage ratios, but I
have to admit you have a good idea there. I mean, that’s pretty much
what caused this mess in the first place. Though some could argue
it’s not a matter of ratio, but rather, a matter of what research
went into such leverage, i.e., what risk analysis PER LEVERAGE has
been done.
2) I’ve aready addrssed the fact that the bankers who got us into
this mess CAN and WILL at least HELP to get us out… they may not
get smarter over-night, but trust me, they’ve learned their lesson!
Add that to regulation, anf of course they’re not going to be as
careless! /// People will save more, especially after seeing what
happened; whether or not people get more financial opportunties
depends on the presidential race, i.e., if Obama wins, there will be
more job growth AND tax cuts for people making less than 200K a year.
Those are the EXACT people we need to help! C’mon Cuban, open your
eyes–this guy’s your man! McCain would never take your suggestions,
while Obama would probably–literally– sit down and talk with you
and take your advice on many of these matters! (Plus, he’s into
basketball, lol.)
3) Touche. Can’t argue with that.
4) That’s not fair. We’ll have to wait and see. Plus, it’s not nice
Cuban… have a heart! (jk, jk)
5) ETFs might work, but still, we can use Obama’s same idea for gov.
expenditures –put them into a Google-esque database–
to those of bailout funds. Cuban, no one will ever understand the
market 100%, but if we’re allowed to see more transparency in an
online, black-and-white, no-spin database, we’ll be better off than
we were even BEFORE three or four years ago.
6) The SEC is getting rid of short-selling? I agree that
short-selling serves a vital purpose (not all the time, though, which
is what we have to admit). Still, however, if– once again– we see
that Dow Jones jumps 500 points in the next year (I said “if” lol),
then we’ll have to concede that something went right!
Look, there are always winners and always losers. I discussed this
when I posted about there being different goals; some want more
market points, some want less unemployment, some want increased
levels of consumer confidence, etc. So yes, the market indices do
not show us, in themselves, how well the market’s doing. But damn,
there’s usually a pretty strong correlation!!!
7) Fair enough. But once again, this is simply a matter of better
regulation.
8) I’ll trust you on this one.
9) FDIC is the way to go. But also, ALWAYS TALK TO THE FDIC DIRECTLY!
IF YOU HAVE TO SPEAK TO A BANKER, BRING A TAPE RECORDER! BANKERS HAVE
LIED TO THEIR CUSTOMERS BEFORE– OR THEY SIMPLY SAID STUFF THAT
THEY THOUGHT WAS TRUE BUT TURNED OUT TO BE FALSE– SO YOU NEED
RECOURSE IF YOU INVEST BASED ON FAULTY INFO FROM A BANKER.
BUT REALLY, to avoid all that mess, SPEAK WITH THE FDIC DIRECTLY!
And always keep notes of the names of those with whom you speak,
AND ALWAYS ALWAYS ALWAYS back it up by asking the same questions
a week or two later. The answers should be the same
(legislation pending).
Comment by the-cuban-responder -
The current mortgage crisis was seeded when the Johnson administration
“privatized” Fannie and Freddie, exacerbated when the Clinton administration
pressured Fannie to make home mortgage more “accessible”, aka dropping
lending standards.
Congressional democrats like Barney Frank have over the years
completely failed to properly supervise the management of Fannie and
Freddie.
Now Obama is trying to blame the crisis on McCain and the philosophy of
“deregulation”. In reality Obama has been a big beneficiary of
Fannie and Freddie’s campaign contributions and it is Senator McCain
who has been long critical of the way these two entities were run.
Obama and other democrats like him are responsible for this mess. I am
surprised that McCain didn’t call him out on this. I am sure
Romney would have hammered the junior senator for such idiocy.
http://gregmankiw.blogspot.com/2008/09/distorting-history.html
Comment by aml -
You’re a smart guy….. Smart and Sharp….
Comment by Joseph Muench -
Why not give the $700B to the American people to deposit in the banks as time deposits that the banks can then lend out?
How about this idea for calming the current financial liquidity crisis?
Instead of handing money over to financial institutions directly, return the money to each and every American in a manner similar to the recent income tax prebates.
However, this time the money is required to be put in the form of time deposits in banks, much like CDs.
This way the money enriches the American people who are required to keep the money on deposit in banks for a proscribed term. The minimum term can be set to provide the needed market stability and minimize inflationary affects.
The banks in turn enjoy increased liquidity and are able to lend the deposits out for commerce and industry.
• The banks quickly receive much needed liquidity,
• The banks keep and manage their bad loans,
• Every American holds a note that they can redeem someday for their own enrichment,
• Business prospers and Americans keep their money.
Make the deposits tax free and require the banks to pay interest, also tax free.
This could be done quickly using direct deposit for most tax payers. Others can receive a certificate by mail that they can take to the bank of their choice and deposit.
Call it the Finance American Savings Trust Account or F.A.S.T. Account for short.
It needs to happen fast and should be appreciated by the American people more than the current bailout bill described in the media.
Comment by George Marek -
Pingback: Ryan A Graves.com | Quarantine of Bad Assets
Mark: Thanks for taking a very public interest in this matter and providing a useful and interesting forum.
Small detail: I think the vehicle you are talking about would be a closed end fund rather than an ETF (exchange traded fund). Shares of an ETF are continuously created and liquidated by the sponsor depending on the share price of the ETF relative to the value of the underlying assets. This is why it always trades very close to the value of those assets. Since the assets that you propose putting into the fund are a dog’s breakfast of securities it would be impossible for the sponsor to create and liquidate identical shares.
A closed end fund has a fixed number of shares. The share price is determined by the market and may be (far) above or (far) below the market price of the securities (and cash if any) held by the fund. But shares, once created, are around for the life of the fund and are traded on an exchange such as the NYSE. As securities are sold out of the fund, the cash received can be held inside the fund, used to buy more securities (if permitted by the prospectus) or paid out as a dividend.
A closed end fund may have a finite life. At the end, the securities are liquidated and the cash paid to the shareholders.
From MC>
I want more shares to be able to be issued if there is demand, which means funds can be raised to buy more troubled assets, without dipping into the treasury. In addition, the ETF allows for the exchange of shares for assets, which will keep management honest
Comment by Speed -
Mark,
You continue to prove yourself to be a prescient mind in the world of finance and economics
finance and economics. Your imaginative and creativity are simply
ground breaking. You are right about the lack of transparency (which
will be forgotten in 2 weeks) and the importance of short sellers.
The one question, and concern I do have is not related to the
soundness of your proposal, but rather, will the right people with
the right understanding of business/finance/economy ready your blog?
Something tells me that these blog posts are probably being given
to the right people.. but their arrogance will ultimately stop them
from taking your advice.
You are a billionaire for a reason, Mr. Cuban.
Comment by Nathan -
“falling house prices are the problem” you say? And why do you think house prices are falling? Too much housing stock for one – brought on by too much free and easy credt – pushed by our lovely Government. They played a big part in his problem. They had the opportunity to regulate Fannie Mae, but refused, and even lectured those who wanted to regulate it that they were overly concerned, and could jeaporized loans to low income people. They PUSHED the idea of over-leveraged loans (100% financing) and little regard to whether the buyer could make the payments. PIGS!
Comment by Lily -
My gripe is that we need to show a unified stance on the bailout to
try to help keep our international credit standing from plummeting too
far down the scale. I understand that everyone has ideas that will or
will not help, but the administration let it go to far before calling
on a plan. The White House Deputy Press Secretary stated that the had
been working on the bailout issue for months and weeks and regretted that
Congress only had a few days to enact a plan. Link avail if wanted.
Term limits as a threat just inflames the issue if linked to the plan.
We already have the ability to vote them out. Stimulus was not added
to the plan in effort to get a plan out quickly which will give a little
more time for conversations on how to shore up what is left of our economy.
If we do not put a plan in place everyone thinks that the guys on Wall
Street will be the ones hurting. I differ on that conclusion a little.
Look at WaMu. Quickly sold as it was announced as failed. WaMu had $307
billion in assets. It was bought up for $1.9 billion with a pledge to
absorb $31 b in failed mortgages. Quite a deal in my book.
On the short selling of stock, my readings of what was happening there
really was shocking. It looked to me that the fox was regulating the
information about what was happening in the hen house. I do expect to
see more oversight and a return to short selling. Naked sales are a
different monster.
Comment by Michael -
The real question is which Mr. Buffett will you listen to? The one who rarely gets involved outside of the capitalistic system and would not want government involvement in the regular course of business and who stands to gain personally from keeping the markets up, or the Mr. Buffett who used to listen to his father, Congressman Howard Buffett, who certainly woud have seen this bailout for what it is – a huge step in the wrong direction and an enormous loss of freedom for this generation and the next.
Conservative values. Like faith, without works, they are dead.
Comment by David -
Has there ever been a better time to call for term limits? How about this: anyone who does not vote no to this legislation automatically becomes subject to retroactive term limits. If you’ve already exceeded the limit, you’re done. No grandfather clauses. If it is that critical that this legislation in its current form, let’s see how important it is to them and where their true allegiances are.
– Mike
Comment by Mike Moreland -
“If you have less than 100k dollars in the bank, do nothing. You are protected by the FDIC”
You assume that once a bunch of banks fail that the FDIC has the funds to cover the loses. It doesn’t, it pretty soon there will be a bailout for the FDIC.
After that, there will be a bailout of the United States government. Look for countries to ask for the US military bases and weapons systems as collateral.
We’re toast.
By the way, to Commenter Jack above, you might want to reread Mark’s “Who the sucker” line. Look’s like you’re the sucker.
Comment by Timothy Post -
“Mike, these guys did not cause the problem. If you have been listening, falling housing prices are the root of the problem.”
Well, not exactly. Falling housing prices is the equivalent of crapping out in Vegas. As long as housing prices continued to increase, the borrowers who couldn’t afford their mortgages could get out from under the mortgage by selling their house.
The root cause is our government putting in place mechanisms that made it attractive for the market to make loans to people who couldn’t afford them or could only afford them with th estars alogned.
The stars are no longer aligned. The government’s hand has been called and our legislators are trying to run from the table. And as always, we’re left holding the bag.
Sorry for any typos – I can’t see the full text box in Firefox.
– Mike
Comment by Mike Moreland -
Mark,
Great thoughts. Isn’t there terrible irony in the Clearing Corporation trying to set-up a CDS clearing house. Any idea who owns the Clearing Corporation? 11 Major Banks.
Alex
Comment by Alex -
Pingback: My Congresswoman, Anna Eshoo, on the Bailout « Libertarian Soap Box
Mark,
I want to throw the bums out of congress and elect people with a business mind like you! As a responsible citizen that pays my taxes and doesn’t get into debt that I cannot afford, I resent this bailout. I am writing to my state senators and my congressional respresentative about my disapproval about this bailout.
What is your opinion of Obama’s tax plan? Do you think he can fund all his programs by just punishing those in the >$250K income level? My husband and I are not wealthy by any means, but being upper middle class, we just fall above that $250K category that Obama wants to punsih. I have 3 boys to put through college. We self-fund our retirement plans. My husband is self-employed and if Obama is elected, my husband will have to pay more taxes. I work for a company in which I have to pay part of the premium for my health insurance ($134 every two weeks) and although the insurance is fairly good, it doesn’t cover all of our costs, so I usually have $3000 out of pocket additional costs through out the year. My point is, if Obama gets elected and puts forth his tax plan, we will no longer be able to purchase stocks and we may not be able to fund our retirement plans. My husband will most likely lay off or fire employees of his small business. No one has ever helped us and we learn to live without certain luxuries so that we can pay our bills every month. I am so angry about having to solve a crisis that I did not create! What can I do?
Comment by Nancy WIlson -
While I disagree the bailout is necessary, I do think some of the ideas Mark mentioned would make the rescue package much better than the current proposal – especially:
– stricter limitations on debt leverage ratios
– putting the assets into ETFs
– resuming short selling
In addition to the benefits an EFT would bring in terms of transparency, the government could also sell off assets as soon as they brake even to reduce taxpayer exposer as soon as possible. There will be way too many eggs in one basket and so minimizing risk is more important than trying to maximize return.
Comment by Doug -
Mike, these guys did not cause the problem. If you have been listening, falling housing prices are the root of the problem.
Basically it comes down to this. We are facing a financial crisis that needs to be fixed. We need the smartest, most experienced minds on this issue. Hank Paulson’s track record speaks for iteself, as he build Goldmach Sachs into the greatest trading institution of the last 100 years.
Let him do his job if he feels he can get us out of this mess.
Comment by Jack -
The US Gov’t isn’t the sucker at the table.
They can pass on all of their losses to someone else.
The US Taxpayer is the sucker at the table. And they’re not even at the table.
Comment by Dan -
Jack,
The people trying to solve the problem are the same people who created the problem.
Any “solution” the government creates that injects more government is a very bad idea.
We need to package this problem so that the free market can solve it.
Mark’s ideas are compelling and I hope getting in front of the bold House Republicans who are refusing to support the “bail out.”
Mike
Comment by Mike Moreland -
Warren Buffet has privately told congress to get the bailout done. He has nothing to gain from this personally, and he also happens the greatest money man of modern times. Therefore we can pretty much rest assured that the bailout is a good thing, and we will all benefit from it in the end. And remember, Hank Paulson used to run the greatest financial trading instituion of this centrry (Goldman Sachs), so he is no idiot either. Let the guys who know what they are doing solve this problem…they are the most qualified to.
Comment by Jack -