I just don’t think that we should agree to something because there’s no alternative on the table. Let’s get a reasonable alternative. You see that Wall Street didn’t get excited about the Senate passage of this bill…

(Thanks again for your comments. I love reading them!)

If you consider 20% down, “financially responsible” for home owners, it’s still levered 5:1 for consumers. When Bear Stearns and Lehman failed, we were talking about a leverage ratio closer to 30:1. Supposedly, the banks see their activity restricted once they hit a 12:1 ratio, but assuming that a “responsible bank” is at a 10:1 ratio, it would mean that even if 10% of the public loses confidence and pulls their money out of the bank, then there is nothing left for the remaining 90% that didn’t participate in the bank run (except these devalued loans that the government is talking about buying). In the dog eat dog world that your posts argue for, the 10% who actually understand how serious of a crisis this is are going to be rewarded while those who either don’t know (the public) or those who refuse to participate in making the problem worse (long term investors) will potentially become creditors of a bankrupt organization.

If there were enough private investors to solve this problem, then we wouldn’t even be talking about a bailout, but when you have major investors putting in $5 billion in WAMU and then a month later they have nothing, how are we supposed to expect the private sector to open up their wallets and recapitalize the banks? The same is true for these loans. If someone helps further the American dream by buying a morgage at par and then sees it drop to .90 cents, they don’t have a lot of confidence to keep throwing money at the bond and then because of the liquidity issues, they see more of these loans hit the market at .80, .70 and .60 cents on the dollar people become increasingly gun shy to continue to support the economy by buying these investments. If the banks can’t sell at a rationale valuation and yet they are forced to sell because of liquidity issues, then even those investors who may have bought paper at 60 cents will keep waiting because they know that there is still a ton of this stuff out there waiting to hit the street and they don’t want to see their .60 cents get cut in half by the deleveraging that still needs to take place. Meanwhile banks are being toppled because they are undercapitalized and are being forced to take huge losses on loans that are still performing.

So why is it bad for the banks to fail? Well some (and I would argue that this means the US government) are going to get a great deal on these investments, but in the meantime, banks will hoard cash because they fear that panic will overtake their business models, which will make it harder for entrepreneuers to get start up financing, for responsible existing businesses to get loans and maintain existing lines of credit, which will impact private investors who see their savings or investment portfolios wiped out because of these failure, which certainly leads to higher unemployment because there are less wages to pay out and less capital that is willing to fund the system, which will lead to more people defaulting on their homes because they don’t have any income, which will cause spending to slow down, which will lead to more businesses failing, etc. etc. etc. This price is too high to pay just so that people can get a good deal on investments.

Now maybe the bailout plan won’t work and we’re all toast anyway, but they have to do something to restore confidence to the market because if they do nothing, the bank run continues and hard working people are going to lose everything that they have. If the plan does put an end to the bank run, then these banks will at least have the opportunity to hold their bonds to maturity like you suggest.

Some may feel that it’s good for “responsible” investors (or even short sellers) to be able to pick up huge bargains or to profit from the value destruction that we are seeing, but when I see “responsible” ordinary hard working people losing their life savings, just so that the few can end up profiting, I can’t help but feel that this laissez faire is the wrong attitude to have (and this is coming from a card carrying member of the Libertarian party.)

We can disagree on how much of a band aid that this will really be, but I’d rather hear suggestions on how to fix the system then to simply reject this plan over an academic argument. Whether or not anyone wants to believe it, the bailout plan is really about putting YOUR money back into your bank account, by stopping the withdrawals and giving the banks enough time to stabilize the system, it will allow the economy to run smoothly and at least gives us a way to break this vicious downward spiral that our entire economy seems to be in.

I just don’t see an individual or a bank needing to have a fire sale as a bad thing. In the case of a home, it will allow people who otherwise couldn’t buy a house to get a great deal. (i.e. We’re rewarding those who were responsible and waited.) In the case of the investments, it allows private investors to get a great deal on an investments that you seem to say will pay off long term. (i.e. We’re rewarding them for taking the risk today.)

This plan is all wrong, and doesn’t really fix the core problem. If it doesn’t fix it, there’s no sense in wasting the money. It’s like putting a bandaid on a wound that needs 300 stitches. It’s not going to fix the problem.

(Thanks for your comments!)

If you bought a home for $500,000 in 07′ and because of the crisis it’s now only worth $250,000, then it will impact your personal balance sheet, but it is only significant for those who are forced to sell. People who bought ARMS that they couldn’t afford are going to have to get rid of their homes at fire sale prices and won’t have the luxury of buying and holding to maturity, but the responsible borrowers shouldn’t have to pay for other people’s irresponsibility.

On the other hand, if you have a responsible borrower who lives across the street, who still has a job, is making payments and doesn’t plan on moving, then the price of their home is really more of an academic issue then financial one. Sure, they probably wish they would have waited and got it at a better price, but over time they’ll pay off their debt and their equity will go up.

In the case of the homes, it’s only a small section of the market that is actually being forced to sell because your bank isn’t allowed to call you at 9 am and tell you that they need you to pay down 10% of your loan by 11am.

Now compare this to what’s going on at the banks. The banking industry has always been built on loaning the money that YOU deposit out at higher rates and certainly over the last ten years, their standards have gotten terribly lax, but because of margin requirements and a run on the bank, they don’t have the luxury of waiting for their good assets to mature. Effectively, the credit freeze is putting them into the position of the ARM borrower who doesn’t have the option of waiting, but it’s their depositors who are being put into the position of risk.

So if our choices are to have the banks fail because they really don’t have enough collateral to back up the money that the American people have given them or to have the government step in and stop the bank run so that banks have the option of deleveraging in a more orderly fashion (or to hold their loans to maturity like you suggest), then I have no trouble supporting it.

If there was enough private capital to hold these loans, then we wouldn’t be in the position that we are in today. We can play the blame game, but the reality is that the banks are being forced to unload “houses” at fire sell prices and only the US government has the money to buy and hold these securities. With 92% of the residental mortages still paying on time, the cost of the bailout won’t be the $700 million that you keep pointing out, it will be the $700 million + or – what they end up getting back and because of the prices that the government can buy these loans at, it’s reasonable to expect that they could make money on this deal. If we can restore confidence in the banking system, allow home owners to hold their homes to “maturity” and prevent the banks from having to unload good bonds because of margin calls, then the entire economy will benefit.

It’s easy to point to the bank failures and to stubbornly refuse to help them, but the cost of forcing these banks to fail will be far more than the potential profit or loss that the US government will make on this deal because they have the luxury of holding these bonds to maturity while the banks do not. I won’t argue that the banks have been irresponsible, but would you really have small business owners, regular working Joes and worried homeowners be the ones who end up paying the price for these excesses? The bailout isn’t ideal, but letting the banks burn to the ground would be far worse for all of us.