Steve Yuen wrote on October 10, 2008 08:07 PM: I love the term "toxic assets" because so many people do not understand it. Today, the house that you own and live in is a toxic asset. It is toxic because you cannot sell it easily, and because you cannot sell it easily, its value keeps going down. Today, buyers with a FICO score of 800 are being turned down by banks because they cannot come up with 20 or 30% downpayment. This might even be an understatement. So you are stuck with an asset that goes down in value day after day for the lack of viable buyers. The credit crunch causes banks not to easily make mortgage loans, which in turn depresses the housing market further, which in turn causes whatever mortgage loans the banks still hold to lose further in value because the collaterals are seen as less valuable than before. These things feed on themselves. The credit crunch has already caused auto dealerships to fail because they were not able to sell their cars through credit. That means their brand new cars did become a toxic asset. To break this vicious cycle, the US govt is stepping in to provide a floor price to the devalued mortgage assets that the banks hold, so that they will have the cash to loan out again. Today, these assets are toxic, but a few years down the road, they should become a lot more valuable, giving a huge profit to the US govt that bought them at bargained prices.

Steve Yuen wrote on October 10, 2008 07:19 PM: A few weeks ago, Washington alllowed Lehman Brothers to fail and announced that they would not do the same to AIG. Then for mysterious reasons they changed their mind within a matter of hours. This had something to do with the many phone calls from many prime ministers and presidents all over the world, including President Hu of China. When you owe somebody that much money, you need to listen. This piece of news about Hu calling Bush was widely reported in foreign media but not read in the US media. Silly ego?

AIG holds a lot of credit-default swaps, i.e. insurance policies against the failure of a borrower to repay its loan. Many foreign banks bought these policies with AIG to insure against Lehman Brothers' default if they failed. Fail they did, involving $400 billion in derivatives, not all of which were interlocked with AIG. If Washington had not given AIG the right to tap into an emergency loan of $85 billion, AIG would have failed to honor their insurance policies. Then a lot more foreign banks than we now know would have failed. Dow Jones would not have lost just 40% of its value. A lot more US businesses would have failed in the midst of this disaster. In exchange, the US govt got back 79.9% of the AIG preferred stock. AIG is still profitable in some other divisions of its huge corporate structure. What they needed was the cash to help them survive for the next few months, during which they will sell their profitable divisions to repay the US govt.

Steve Yuen wrote on October 10, 2008 06:03 PM: If Washington had been monetizing the national debt by simply printing more money, they would not have waited till now. They would have done it much earlier instead of selling our debt to foreigners. China holds about 10 percent of our national debt when it was still about $9.6 trillion. It means that even our Iraq War was paid for by Beijing. Other countries include Japan, Germany, Korea, and a few Middle East countries that are in effect protected by the US.
In theory, these foreign governments may dump the US treasuries at will, causing a noticeable devaluation of the US dollar. However, the relationship is interlocking. Before they finished dumping all their US treasuries, these dollar-denominated debt instruments would have gone down so much in value with the depreciation of the dollar that the dumper would sustain unacceptably high losses. So in practice, they cannot afford to do it without hurting themselves a lot.
Those scary theories are not rooted in sound knowledge in International Economics or International Finance.

Steve Yuen wrote on October 10, 2008 05:41 PM: Today's announcement that the Treasury will buy preferred stocks in banks is good news, copying a model done during the Great Depression and what the UK govt. has just done. Shoring up this part of the banks' assets will spill over to the value of their common stocks, creating upward momentum for these banks and the stocks market.
The P/E ratios of many bank stocks have plummeted so much through panic sellings that Washington WILL make huge profits in the near term, perhaps 2 to 3 years. Wells Fargo that has just bought Wachovia, the largest savings bank in the US, is by far very strong, stronger than CITICORP or Bank of America. After you make money in 2 to 3 years, you do not need to thank me.

Steve Yuen wrote on October 10, 2008 05:32 PM: They are toxic but they are not worthless. They have lost much of their value because they are all mortgage-related securities or derivatives. If you believe that your country will become a third world country, then you are right - the housing market will never revive to a more reasonable level and so Washington will lose money after buying them up. These illiquid assets that have lost much of their value are to be replaced with liquid assets, i.e. cash from the $700 billion. So the left side of the balance sheet will have more weights to support their liabilities and allow the banks to provide both short-term and longer term loans to businesses and individuals. It will be another 3 weeks or so before enough examination is done before the $700 billion is slowly released. In the meantime, we already see that banks hurting from what you call the worthless assets are unable to allow the average guy to buy a used car, as well as provide credit to businesses to support their payroll and State govts to support their daily operations. Take a class in Banking and Finance before buying the groundless monetization theory. We are actually entering a phase of deflation, not hyper inflation, just like what Japan experienced for a very long while after their real estate and stocks market bubble burst. Remember that the Great Depression gave us a 25% unemployment rate. When people have no jobs, how do you raise prices? GM and Ford are teetering on the verge of collapse, tell me how hyper inflation can happen? Go to a local furniture store and Home Depot and you will see the kind of huge markdowns they have done to survive.

Paolo wrote on October 08, 2008 07:10 PM: You will observe the weird, impossible, contradictory position of our masters in Washington:

We will use 800 billion dollars to buy up "toxic stocks." By definition, "toxic stocks" are either worthless, or almost worthless.

Yet, the claim is made that taxpayers will actually "make money" on the deal!

Of course, no INDIVIDUAL taxpayer will "make money" on the deal. At most, the federal government (aka OUR OPPRESSOR) will "make money" on the deal.

But in reality, even the Federal Government will lose money on the deal. They call them "toxic" stocks because THEY ARE WORTHLESS!

No matter how much "liquidity" you pump into worthless, collapsed stocks, you can't make them worth anything!

In other words, this is a complete, total, one hundred percent RIP OFF of the taxpayer!

Well, to be fair, it's not entirely a ripoff of the taxpayer. Since we are already ten trillion dollars in debt, the extra 800 billion will have to be "monetized" (a fancy word for "print up the money").

Thus, the bailout will be felt in the form of inflation, rather than higher taxes.

We are about to enter a hyper-inflation. This is especially true if foreign countries (especially China and Japan) decide to dump treasuries, not willing to be paid in continually-depreciating dollars.

When this happens, the game is over. We will become an impoverished, third-world country, about on par with Mexico or Brazil.

Thanks, Republicans and Democrats! Nice job!

Bill Smith wrote on October 07, 2008 11:37 AM: You just have to love Steve's theory:

Let use the $700 billion we stole from the people and bail out bad investments and we will make a profit in the future. WONDERFUL!!

Paul wrote on October 07, 2008 12:35 AM: Do our elected representatives know better than "we the people"?

Steve Yuen wrote on October 06, 2008 09:53 PM: Further to my last comment, I would like to add that there is a real life example of how government intervenes in the economy, buys up seemingly worthless assets, and eventually makes a profit without burdening the taxpayers at all.
In 1997, the Hong Kong stocks market plummeted by a much bigger margin than what we saw in the last few weeks with Dow Jones. And the free fall lasted not just one day. It went on for 3 or 4 days nonstop. The govt realized that the fall was due to foreign investors short selling in the market in order to make a huge profit. Needless to say, if it was allowed to go on unchecked, by the time they finished their dirty work, the stocks market would have ended up with half of less of its value and the economy would have collapsed.
The Hong Kong govt took out hundreds of billions of dollars to intervene. The end result was that those foreign investors shortselling in the market sustained heavy losses. After a few years, the stocks that the Hong Kong govt. bought enabled it to make a profit, not burdening the taxpayers at all.
In about a month, the US Treasury will have a more complete picture of what toxic mortgage loans and related financial instruments they need to buy from banks. In 5 years or more, the housing market should go back up, enabling the US govt to make a profit.
Actually, today's $810 billion expenditure will not be added to the national debt unless the assets are sold at a loss in the future.

Steve Yuen wrote on October 06, 2008 07:28 PM: I respect your opinion. I totally agree with you that many Wall Street CEOs did not deserve the bail out at all.
You implied that it was not necessary to use $700 billion or more to do any more bail out, because Paulson and the like have already injected many billions into the system over the last few months. Many of such injections are short-term loans from the Federal Reserve at ultra low interest rates that must be paid back. They are meant to provide a temporary fix, say in the next 30 days I need these billions to survive because I am not able to obtain it from selling my fixed assets or raising capital by selling corporate bonds within a short time.
On the other hand, much of the $810 billion passed is meant to buy from many financial institutions their sour investments, i.e. mostly mortgage-related assets which have lost a lot of their value or which do not really have a firm value because the market is still going down. The balance sheet works like this: once you get rid of your bad assets, Moody will rate you higher and you are then eligible for loans at good interest rates from another bank. The converse is also true, which accounts for Lehman Brothers' fall. They have too many bad assets and they were unable to get a rescue loan from anybody once their stocks (i.e. assets) plummeted in value through short selling.
When troubled banks get rid of their bad assets, they will be in a position to lend to each other.

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