An interesting turn of events occurred last week on behalf of the Treasury and Mr. Paulson’s latest address to the nation stating that the congressional bailout funds will not be utilized to purchase toxic mortgage assets from banks. Well - that pretty much shoots a big hole in my last blog – but I think in the end it’s a good thing.
Why are they doing this? They certainly aren’t saying much; simply, “We don’t owe anyone an apology due to the rapid changes in the financial markets and priority need for the bailout funds”. Ok, I’ll buy that – even though I would not have a choice otherwise. I think there is some hidden good news in this new path and the government is simply not ready to share it with the world just yet. But why? Because it would add additional confusion and debate as to why there was a bailout in the first place. I still agree that this action was absolutely necessary and the financial markets would have crumbled without it (a lot more than it already has). It now appear that there are a few new priorities for the money – or is it a matter of the “original priorities” are, all of a sudden, not as serious? I think it’s both, but let’s start with the later.
I believe that with the new challenges facing the auto industry and the enormous potential for further increases in unemployment if this sector fails, coupled with an additional punch to the consumer, the government is being very mindful of where to utilize the bailout funds. More interesting, however, is that the Treasury, in its investigations of what mortgages to buy and from what banks, has found that the banks themselves are efficiently selling these assets at a break-neck pace to the private sector. And furthermore, the capital providers / buyers of these assets have built sophisticated production systems to aid in the organization and completion of the secondary transaction on the back-end – be it a refinance, Note modification or principle reduction of the mortgage, it seems to be working very well.
How do you deleverage a bank? The concept is simple, but harder to actual put into practice. When a bank has too many loans on its book in accordance with its assets – you either need to raise capital (good luck in this market) or sell loans. I think the Treasury and the Fed recognize that both need to happen in tandem – and the selling is already taking place at a faster pace than they expected – or could ever compete with. So why not use the funds to help capitalize the banks to aid in the “priming of the pump”?
This also gives the government more available funds to bail out other industries – like the auto industry. No, I am not a fan of this idea and it is troubling that it will occur. There is no stopping it now, but we can hope that they are smart enough to fix the massive ineptitude in the auto industry’s management and the screwed up union contracts. But where does it end? I really have no idea – and it is becoming more and more difficult to predict what is really going on out there.
I have had the great fortune to have connections and friends throughout the world that have shared a lot of facts that simply are not making it to the media. I personally think it is getting better – and by leaps and bounds. It will take some time for this to bleed into the stabilization of the economy, housing, employment and the eventually benefit the consumer – there’s simply too much settling and work to be done at this time. However, the bottom is nearing and when it is upon us there is a sizable enough economy to witness growth and prosperity.
May the ideas of capitalism still shine on America to enthusiastically promote the next generation entrepreneurs that will, no doubt, continue to save this country from slipping into something other than what we’ve fought so hard to achieve.