Bailout

Reader comment on: Fannie Mae and Property Rights
in response to reader comment: What You Are Missing

Submitted by Adam (United States), Feb 23, 2015 11:20

One of the items that i think is missing is what really happened during the bailout. As I am sure you are aware the credit market seized. Very simply you have what you feel to be liquid securities that you have earmarked to pay operating expenses that become no longer liquid for a reasonable fair market value. We can all agree this is what triggered the crisis yes? Now take this to the Nth degree with all of the banks and investment banks that are undercapitalized and no longer can generate cash without selling current assets at well below reasonable fair market value all over the country and world. MBS and CDO's are now selling at pennies on the dollar and financial institutions are boardering on solvency from the perspective of not being able to generate cash to make payroll for this simple reason. How does the Federal reserve fix the problem? They create demand at 100c on the dollar by taking over AIG and the GSE's under the guise of them being insolvent. Now banks and other financial institutions can sell these securities back (remember the government now owned the board and senior management) at 100c and help the institutions to pay their bills until the credit market unfroze. Would this not be the biggest bang for the buck? I personally think it was genius. If you want proof follow the cash. In a normal bailout scenario the company would churn cash. If that was the case, how did Fannie manage to pay back such massive amounts of cash in 2013 and 2014? The answer is simple. The securities they purchased were written down significantly as they paid well over market price creating GAAP write down of AFS securities. Once the housing market recovered these assets appreciated in price returning the balance sheet to significant GAAP solvency. The question is where did the GSE's generate the cash to pay back 230b in really two years? The answer is simple and obvious. They never spent the bailout funds from the Treasury. If they would have churned the cash they never could have generated this level of cash flow from operations as you so succinctly stated above.

While I would agree with you if the bailout was one of operational failure. This was a bailout of Political creation to inject liquidity into financials by purchasing their previously valuable liquid current assets for pre crisis pricing. Take a look at Q1 2009 bank earnings sometime and look at the massive trading gains. The facts are in the numbers, not in the symantics and political posturing.


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Other reader comments on this item

Title By Date
What You Are Missing [661 words]John CarneyFeb 23, 2015 10:42
⇒ Bailout [433 words]AdamFeb 23, 2015 11:20
Disagree with Carney [95 words]JC criticFeb 23, 2015 16:33

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