Both Mr. Paulson and Mr. Bernanke displayed extreme concern to protect the interests of American Tax payers while seeking $700 Billions from their existing pocket or from their 5 coming generations. One generation may not be able to take so much of load. The question arises, whether their bail out plan was genuine or was it the proposal from these con-men to manipulate whole financial system and defraud the American Tax Payers? These public servants are supposed to follow the best practices and protect the pockets of the tax payers. Do they?
If you read what Bernanke said during the Congressional hearing, you will ask “Where is the protection of Tax payers under the $700 billion plans? Mr. Bernanke said he was not in favor of paying the price of “Fire sale”. Mr. Paulson said that he was willing to buy the Bad Debts at substantial discount (about 35%), that is, paying $65 for every $100 face value of the debt and holding them until maturity (HTM or Held Till Maturity). To one question from the Senator, how much the securities are worth now, Mr. Bernanke said only a few cents! Oh my God! Mr. Bernanke is in charge of FED overseeing the dollar that only he can print which bears the imprint “In God We Trust”. In reality, they care the least about the God.
Read them together, the Paulson – Bernanke plan foresees the payment of 65% of face value of $100 for the Bad Debts currently trading at few cents (about 20 cents to 98 cents). What is the Asset backing? Big Zero. Why? Because all derivative papers are secondary mortgage papers or mortgage with second lien that gets paid only after primary lender is paid off. Since the primary lender has foreclosed, seized and sold the mortgaged property, and he retains both the surpluses and deficits under the law, nothing is left for the secondary mortgage holders who have to rely upon the mortgaged property alone. They have no other recourse or option to realize their dues.
The question arises, why Bernanke and Paulson are bent upon paying $65 when the security backing is ZERO and current market is just 20 cents. That is, they are willing to pay the premium of 320 times or 32,000% more than the market value. As public servants, they have fundamental responsibility to look after the interests of the American Tax Payers (ATP), and buy the assets at the best bargain price or at least current prevailing price. Anything contrary to this dictate, amount to betrayal of and defrauding the tax payers to the extent of $700 billion dollars”
Holding Till Maturity…A great deception
Mr. Paulson said that he (treasury) would hold the securities until maturity to realize the full value. There is no market for those securities at the moment, he said… Since the Treasury will have no tangible security under the secondary mortgage paper and it can not sue the borrowers due to non recourse nature of the mortgage, the possible value realization is ZERO, whether he hold them for one year, 10 years, 30 years or 100 years. That is, the entire amount of $700 billions will turn to ZERO almost instantly when distributed or used to buy the bad debts
Why do Paulson/Bernanke duo want passage of bill before September, 2008 end?
Mr. Paulson and Bernanke also want clean passage of bill before this weekend, that is, before the September end. Also, significant is the ending of ban on short selling of financial shares 2 days later or October 2, 2008. Again read them together. What Mr. Paulson and Bernanke seek to achieve by hustling agreement before September end? Here is the possible explanation.
Manipulating the Market Price of worthless Derivatives
September is the end of the quarter or Q3. The quarterly result or Q3 for the period ended September 2008 will arrive in the market in second or third week of October. If the bad debts are bought before September quarter, new market price will be established @ $65 against just 20 cents at present. Under the MTM or Mark to Market rule, the securities are marked to market price for valuation purpose. By paying the price of $65 against just 20 cents, almost all banks will be valuing their portfolio at newly established market price – $65 against 20 cents.
This is nothing but the manipulation of the market price by artificial means. All banks, investment banks, and brokers will be re-valuing their portfolio based on concocted market price under MTM rules, and they will start reporting bogus profits by reversing the excess provision in the past and providing less for the future. If this was to be pursued, why did not he propose it before Bear Stearns, Lehman Brothers and Merril Lynch came into serious trouble? They could have been saved and prevented the domino effect in the world financial markets. Thousands of investors could have saved billions of dollars of losses, and the present scenario would not have arisen.
What happens if the $700 billion proposal is passed before September end?
If the budget is passed before September quarter, there will be huge rally in financial shares. When the short selling ban on 799 financial shares is lifted by SEC on October 2, there will be fierce short covering rally that may see the financial shares choking up 20% to 60% gain in single session. When the reporting season starts in mid October, all bank shares will show tremendous improvement in their profit and balance sheet due to use of concocted market price that will fuel further rally.
Looks Banks and brokers will be saved…But who will be the losers? – Tax Payers. How?
If some one gains, some other loses. Who will be the loser? Of course, American Tax Payers who’s $700 Billions will be gone forever. Their bonds have neither tangible security nor any other recourse to pursue the defaulting borrowers. The next 5 American generations will never pardon the President Bush, Mr. Paulson, the Treasury Secretary , Mr. Bernanke, FED chief and Mr. Cox, the SEC Chief for criminal waste of $700 billions, misrepresentation and fraud for which they will never be tried – for ever.
What should be the correct approach?
Instead of manipulating and falsifying the entire debt market, and losing Tax payers’ $700 billions in a flash, it is time to let the bankrupt banks to really go bankrupt and not spend even a single good dollar after every bad dollar. The nation will be better off in granting $300 billions to remaining good small regional banks to ease the credit crunch which will be more satisfying than distributing largesse to bankrupt banks, investment banks and brokers.
If the banks and brokers were to be saved from complete disaster in the interest of the economy, the accounting rule should have been amended to permit these culprits to consolidate their debts in some warehouse similar to RTC, without any sort of federal guarantee to save the taxpayers, and be allowed to be written of in 10 years @ 10% of such losses.
What is true Capitalism?
In true practice of capitalism, the efficieny is rewarded, and inefficieny penalized. The present practice of Paulson and Bernanke mocks fun at capitalism. The present plan is not a “bail out” but mouse trapping the Americans.
Lady Liberty may be crying in the middle of the sea, lamenting “What happened to my America”
Kalidas, Hong Kong