Why You Read EPJ

Andy Kessler in today's WSJ:

Wall Street and banks live by short-term loans.

EPJ in September:

Since the Fed operates on the short term end of the interest rate spectrum,that's where investment bankers borrowed their billions. Borrow at the low short-term rates and lend long on mortgages and the like at higher rates, and earn the spread. That was the Fed enabled game.

Kessler today:

But here's the current dilemma: If Treasury pays more than market price for these distressed securities, it would look like a taxpayer gift to Wall Street. That's politically unfeasible. So Treasury has to pay the current distressed prices. (Despite this week's stock-market bounce, prices are still dropping on toxic CDOs.) But if Treasury pays current, fire-sale prices, it would lead to major write-downs at banks. Since most of these securities are collateral for other loans, and regulators force banks to have minimum capital requirements and cash on hand, any write-down in value immediately means new capital needs to be raised. And then who would throw good money after bad?

EPJ in September:

Treasury Secretary Paulson's "bailout" plan has little to do with bailing out banks in trouble. In fact, if his plan is approved by Congress, it is likely the number of banks that will be in trouble will hardly decrease. Billions more in real bailout money will be needed to bail these banks out...You see, Paulson wants to buy the mortgages on the cheap, at their "real" value. But the bad stuff, the sub-primes, and the like, are worth at best 50 cents on the dollar. For banks that are insolvent because they own this paper, a Treasury purchase of 50 cents or less on the dollar isn't going to help things, indeed, it may make it clear to even more that these banks' liabilities far exceed their assets. The only way a Treasury purchase of these mortgages would help is if they were bought closer to face value, boosting the value of the banks assets.