Re: There Is No Such Thing As A Fiscal Conservative Who Supports Throwing 700 Billion Dollars Of Taxpayer Money Down A Rathole

25 Sep, 2008 by Katie Favazza

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John:

Yesterday and the day before, I agreed with you 100 percent–that there was no way a fiscal conservative could ever support the plan as it has been laid out. That is, until I read this article in the Wall Street Journal:

My analysis suggests that Treasury Secretary Henry Paulson (a former investment banker, no less, not a trader) may pull off the mother of all trades, which could net a trillion dollars and maybe as much as $2.2 trillion — yes, with a “t” — for the United States Treasury.

I think everyone should run, not walk, to read this analysis. In one key section, author Andy Kessler explains:

Taxpayers will get their money back on AIG. My models suggest that Fannie and Freddie, on the other hand, are a gold mine. For $2 billion in cash up front and some $200 billion in loan guarantees so far, the U.S. government now controls $5.4 trillion in mortgages and mortgage guarantees.

Fannie and Freddie each own around $800 million in mortgage loans, some of them already at discounted values. They also guarantee the credit-worthiness of another $2.2 trillion and $1.6 trillion in mortgage-backed securities. Held to maturity, they may be worth a lot more than Mr. Paulson paid for them. They’re called distressed securities for a reason.

Kessler, a former hedge-fund manager, ultimately concludes:

You can slice the numbers a lot of different ways. My calculations, which assume 50% impairment on subprime loans, suggest it is possible, all in, for this portfolio to generate between $1 trillion and $2.2 trillion — the greatest trade ever. Every hedge-fund manager will be jealous. Mr. Buffett is buying a small piece of the trade via his Goldman Sachs investment.

Again, John, I was in complete agreement with you before I read this article. But it seems to me that this explanation makes the bailout sound, in theory, as a great example of free-market principles guiding our supremely fallible government.

I’ll be the first to concede that things that sound good in theory don’t always play out as such. There’s also the issue of Congress–and there’s sure to be hiccups when there are too many cooks in the kitchen.

If Congress can pull this together, however, in a way that makes a profit and relieves taxpayers, how could a fiscal conservative not support it?

Update from Hawkins’ That is actually a really intriguing idea — and I mean it. If the government could end up clearing 2 trillion dollars on this deal then yes, a fiscal conservative could support it — as a temporary measure of some sort. However, my BS detector is going off at full alarm on this for one simple reason; when anything seems too good to be true, it probably is. Additionally, as The Big Picture points out, if what Kessler is saying in the WSJ is true, it raises a very obvious question;

What does this say about the private sector? Why can’t the all of the private equity funds, sovereign wealth funds, and enormous pools of capital do this themselves? There are trillions of dollars sitting around in cash, yet none of it that sees any value here?

I guess that Hank Paulson, George Bush and Ben Bernanke — all of whom have been been unequivocally, expensively, tyrannically wrong about the entire crisis from the beginning — are smarter than both the markets, and all of the private equity pools, about this paper?

Does that sound right to you? The guys who missed this from day one — despite many many admonitions from many people — only they see the value in this paper, whereas the smart guys who saw the sh*tstorm coming in advance, and bet against it, don’t?

Actually, Bush did try to fix this problem a while back, but the guy’s point stands. Whenever someone comes to me with an absolutely stunning deal, one that is so good I can’t believe it could be offered, my first thought is always, “Why aren’t the rich guys who make a living at this stuff jumping on it?” Maybe there’s a good answer to that and if so, I’d love to hear it in the comments section because it would be great to believe the American taxpayer isn’t going to get screwed one more time by the hacks in DC.