Bailout Could Deepen Crisis; Firms Are Already Insolvent and Won’t Be Able to Keep Hiding It
September 25th, 2008That’s why Americans have to pay premium prices for this garbage.
Via: Washington Post:
The director of the Congressional Budget Office said yesterday that the proposed Wall Street bailout could actually worsen the current financial crisis.
During testimony before the House Budget Committee, Peter R. Orszag — Congress’s top bookkeeper — said the bailout could expose the way companies are stowing toxic assets on their books, leading to greater problems.
“Ironically, the intervention could even trigger additional failures of large institutions, because some institutions may be carrying troubled assets on their books at inflated values,” Orszag said in his testimony. “Establishing clearer prices might reveal those institutions to be insolvent.”
In an interview later yesterday, Orszag explained using the following example: Suppose a company has Asset X, whose value is recorded on the books as $100. Because of the current economic decline, Asset X’s real value has dropped to $50. If the company takes part in the government bailout and sells Asset X for $50, the company has to report a $50 loss on its books. On a scale of millions of dollars, such write-downs could ruin a company.
Such companies “look solvent today only because it’s kind of hidden,” Orszag said. “They actually are insolvent” already, he said.
Gee, who coulda seen this coming:
http://www.marketwatch.com/news/story/house-speaker-pelosi-reassures-market/story.aspx?guid={512C71B7-AF89-47B9-8EC1-1D2755C29289}
“Speaker of the House Nancy Pelosi said Thursday that financial markets can rest assured that Congress will act on the White House plan to buy up to $700 billion in toxic debt.”
Good girl, Nancy. You’ve become a real master of capitulation.
“In an interview later yesterday, Orszag explained using the following example: Suppose a company has Asset X, whose value is recorded on the books as $100. Because of the current economic decline, Asset X’s real value has dropped to $50. If the company takes part in the government bailout and sells Asset X for $50, the company has to report a $50 loss on its books. On a scale of millions of dollars, such write-downs could ruin a company.”
Solution: have the government buy it back for $110, a $10 gain for the company. Assuming yours is a company that the Bush/Cheney regime likes.
And if you think that Paulson and his cronies haven’t thought this all through, I’ve got a bridge to sell you.
No you haven’t got a bridge to sell me! But you have got a notional piece of paper that says you took out a huge loan on a bridge. What’s that? You’ll sell me the note for $10 billion? Wow, can I buy two of those, and one for my friend? That’s great! Maybe we can sell them on at a profit if we repackage them with a few other complicated bits of debt.
A year later…
Yes I know I sold you that deal. I don’t remember saying it was a sure thing… I did, huh? Well, look… what? You want the bit of paper you paid for? Uh, OK. Erm, hang on while I ask my friend where it is… (hey! where’s that bit of paper? What?! Where the heck is it then? What do you mean we never had it?) Oh excuse me, we’re just looking for it now, please hold… (Ok, OK, don’t panic. We never had the bit of paper, but we do have another bit of paper saying that we own the loan secured on the bridge, right? So we can always just sell the bridge, split the money and cut our losses.
…
…
What do you mean, ‘There is no bridge’?
Hey, wasn’t that Carlson from the 40th floor just hurtling past our window?)
One commentator in a UK newspaper said that the mortgage crisis isn’t really as bad as it may at first appear because all that dodgy debt is backed by a real asset, namely houses here in the USA. But just let me say something about the residential structures that have been going up since, oh, the start of the Clinton Era. These buildings are pretty much just sheets of particle-board (wood scraps immersed in glue and pressed together into sheets of very cheap lumber) slapped onto a wooden frame (and it wouldn’t surprise if these frames were made from pine, the cheapest kind of naturally-occuring wood there is) and covered with vinyl sheets. Then they just put a facade of brick and aluminum siding over all that. These structures start sagging after about ten or twelve years. Yeah, that’s some real value, there, let me tell ya! 😛