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Altruistic helicopter says, let's offer a higher price



September 23, 2008 – Comments (0)

Now, I will ignore the news of Buffet's investment in Goldman (I think it convinced me to hold on to 1 share of BRK-B forever and to buy into tomorrow's rally), because there is nothing much to say. I had a feeling that something like that was coming (in fact, GS was on my buying list, but I procrastinated, letting Warren get ahead of me), but it's only in hindsight does it seem to me like yet another Buffett classic (even better than his legendary purchase of Coke). I think it's safe to buy DJIA calls now. But back to the matter.

Just as we thought it couldn't get any better for Wall Street and any worse for the rest of us, Bernanke has once again proved that there is no limit to his generosity as long it's OPM (other people's money). As AP reported a few minutes ago, "The Fed chairman said he favors buying the assets based on their "hold-to-maturity" value, which would require an estimate to be made of what each security will eventually be worth as payments come in over the years."

Translation: forget all the crap about "potential upside" for the taxpayer. In the optimistic scenario, he will get his 700 billion back 30 years down the road. There will be some nominal interest earned, however, the real inflation will destroy most of the purchasing power of this 700 billion+interest. And don't forget, subprime borrowers will be paying back their loans only as long as Obama offers them one bailout after another (Democrats in congress are already complaining that Paulson did not include a bailout of homedebtors into the package - as if the ink had already dried on the first homedebtor bailout), so it's really the taxpayers who will produce this "maturity value".

Bernanke appears to be a very unusual type of buyer: the one that is most afraid to underpay and is always eager to offer a higher price than the seller is asking. Remember how just two days ago bankers were delighted that someone volunteered to pay them 10 cents on the dollar for their junk? Two days later, Bernanke is having a singular case of buyer's remorse: did I pay too little?

Or, that is, did we pay too little? Because, exaggerating, but only a little bit, the Bernanke/Paulson plan boils down to the following:

1. We pay 700 billion for a pile of toxic mortgages that nobody wants because their "hold-to-maturity value" is mostly ficticious.

2. To make this ficticious value real, we give another 700 billion to homedebtors so that these homedebtors can then, with any luck, pay the 700 billion back to us. Some day.

3. Finally that "some day" arrives, we recover 700 billion dollars with 5% annualized interest from homedebtors, look up the CPI inflation numbers in the latest BLS report, and convince ourselves that we broke even on the deal.  

P.S. I just received another letter from my credit card company begging me to accept a loan from them (3% cash advance fee, 0% APR for a year or 5% APR until paid in full). Looks like there's plenty of cheap credit in this economy as long as you make your payments on time. While I was reading their letter, I thought: what credit crisis?


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