For almost the entire time that I have been following the financial markets, I have heard conspiracy theorists posit that there was a Plunge Protection Team that stepped in everytime the markets were in freefall and bought up everything in sight in order to prevent disaster. While such stories are great for the movies, I am still a skeptic at heart and am aware that manipulation of markets by the authorities themselves is very difficult. Not exactly the process of it but keeping such intervention under the wraps. However, we now have such a PPT and it will have powers explicitly authorized by the US congress!
Trust. How much do we, the people, have in our government, the congress, the treasury, the SEC? They certainly failed to prevent this crisis and maybe even led to it in the first place! Now they want the authority to buy 700 billion dollars of mortgage backed securities! OMG!! While I have been a supporter of recent efforts to shore up the financial system from armageddon, I am amazed at the audacity of this effort. I think though that the combo of Bernanke, Paulson and Geithner (one an academic, one with a career in the financial services industry and one a longtime treasury official) is one of the best to tackle this situation. Yes things could have been done all along to avert this scenario but as Bush said (puke...i agree with him on something), we need to confront this situation first and then make sure we never ever get here again. Something still unclear to me however is on what basis and price they will buy these securities since there exists no regulated market for them. And if they are picked up at depressed prices as I hope they are, banks will have to mark down their other holdings to market immediately thereby further weakening their balance sheets in the process. Unprecedented times for sure.
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This is from:
http://www.samefacts.com/archives/garbage_pail_/2008/09/designing_the_garbage_pail_agency_percentage_proffering.php
about pricing the securities that will be sold to the garbage bin that the government sets up:
"As I see it, the basic problem to be solved is information asymmetry. The institutions may not know much about what their mortgage-backed securities are worth, but they probably know more than the Garbage Pail Agency will know. So if, for some defined class of MBS, the Garbage Pail Agency sets a price of thirty cents on the dollar, the institutions will try to sell to the GPA those instruments of that class that they think are worth less than thirty cents on the dollar, holding the rest, which means that on average the GPA overpays for whatever it actually buys.
One way to fix that would be to eliminate cherry-picking. Each financial institution has a portfolio of financial assets on its balance sheet. Instead of being able to proffer specific assets, require each institution to proffer a percentage of its total asset book. (Presumably we'd want to set an upper limit on the percentage.) As each obligation it holds is sold or repaid, the institution gives that percentage of what it realizes to the Garbage Pail Agency, which means that the GPA needs only auditing staff rather than having to staff up to manage a pile of assets.
Percentage proffering simplifies the pricing problem in that it means that the Garbage Pail Agency only has to set one price per institution, rather than one price per security. But more important, it means that the proffering institution can't take advantage of what it knows about which of its assets are better than they look and which worse than they look."
Excellent points. Also, I wonder if the hurry to get things passed is because Paulson thinks Goldman is in serious trouble (and congress will soon take a break).
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