Thursday, September 25, 2008

The $160 billion buy-in

I have just a couple of observations on the "$700 billion bailout," neither of which is my own, and neither of which have been internalized by the press.

First, $700 billion most certainly does not represent the cost of the bailout plan. True, the Treasury is requesting to spend $700 billion, but it is not as though the money is going to be pushed out of a helicopter over Wall Street. A better analogy would be that the government is buying up $700 billion in real estate, in a land where nobody knows how much the land is worth. But this land is definitely worth a lot more than zero, and the government could even end up turning a profit on the whole deal. In the estimate of the Freakwenter, a $700 billion bailout is most likely to cost taxpayers just $160 billion when all is said and done, about the same as a few months of war in Iraq.

Second, the term "bailout" may be a bad term for it. The Freakwenter proposes that this term be replaced with "buy-in." The government is hoping to temporarily buy-in to a market where sales have slowed down. And the method of buying-in will be a far cry from the theatre of Bear Stearns and Lehman Brothers. No longer will the Feds be choosing which company lives and which one dies. Instead, Henry Paulson plans to do a REVERSE AUCTION in which companies get to compete on reasonably equal terms for the opportunity to sell their unwanted securities. In a reverse auction, the Treasury will offer a very low price for each major category of risky security and gradually up these offers until companies start selling.


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