The $700 Billion Dollar Question

The stakes are clearly huge in the Treasury's proposal to stabilize the US financial system. It looks like the treasury secretary, Paulson, has become even more powerful now with $700 billion at his disposal. I think the plan which promises to buy up to $700 billion of a variety of troubled assets (read mortgage-related securities and loans) will at least enable financial institutions to restructure and recapitalize their balance sheets. But while Wall Street may be bailed out, i still question the impact to Main Street. But a lot of critical answers seem murky or unanswered like what the real prices for these distressed assets are or how these assets will be valued. Also, who is going to manage them and is the government really going to hold them till maturity like it claims to.

The participating financial institutions can dispose of their troubled loans and securities closer to their intrinsic value..this means that all the problem assets will be flushed out and the banks can resume getting back to normalcy. This would go a long way to restore confidence since there won’t be any 'write- downs or losses' every quarter.

Here are some questions for which I think we need some real answers.

How will prices be determined? - This will totally make or break the success of the bailout. With all the write downs as any indications, setting the purchase price is not an easy task. The pricing at which Treasury buys the assets will likely become the benchmark pricing for all mortgage assets.

How will banks decide whether to participate in the Treasury program? - This is weird as participation in the Treasury asset sale program is voluntary. Banks can keep mortgage assets if they consider Treasury asking prices out of line with intrinsic values, taking into consideration ultimate losses from defaults. Again, goes back to the previous question, if prices are not set correctly, banks simply won’t participate.

What will be the impact of such sales to capital base? - This is kind of a double jepordy as the impact on financial institutions' capital will depend on the price levels at which the Treasury makes its purchases. Even if the firms choose not to participate or sell assets into the program may also need to mark down assets based on newly established benchmark prices, leading to erosion of their capital....there by coming out with more 'write-downs'

Is $700 billion enough? - This is the golden one. $700 billion is a lot of money. It is much greater than the $85 billion loan to AIG plus another $38 billion they are giving AIG (just announced today), and the $100 billion of capital support to Fannie Mae and Freddie Mac or the $29 billion to JPMorgan deal for Bear Stearns.

This bailout seems like an extraordinary governmental intervention - although it will provide important short-term relief, does not look like a complete solution to the financial markets. Again make no mistake; the plan will help the banks. I don’t see how the common man is going to be really benefited. To think that the ex-chairman of Goldman will be handing out $700 billion to other wall street banks... It just seems like wall street's his inner circle will benefit from all of this even more... Just barely was the plan announced and he already tapped his favorite banker from Goldman to be his adviser. I just question why the taxpayers money is being used to make wall street CEO's more rich and help them get bigger tax breaks.