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September 21, 2008

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James Moore

"1) Treasury purchases toxic debt instruments from financial institutions at a not-crazy premium to their balance sheet values."

But isn't this right here the entire problem? How do you define that "not-crazy" part?

I'm no expert in the field, but everything I read says that when the people involved talk about "illiquid" assets, they're just lying. The whole problem is that they don't want to sell for anything close to what the market is willing to offer.

If they were willing to sell for market value, we'd have a problem that looked very different. (As in, the trash they hold isn't worth much, so they'd be going out of business...)

Laocoon

I agree that the plan can work and that the goal is to not-so-subtly recapitalize the banks by letting them earn their way out of this mess.

Usually the indentures underlying securitizations and derivative instruments require something like 51% or 66-2/3% of holders to agree on a change to the terms or a dissolution of the securitization.

Ergo, if Paulson/Treasury can buy in enough of a particular deal to control it, then they can collapse it (or resell it to someone who can collapse it), then the buyer has enormous business flexibility to work out the underlying mortgage loans.

That strategy may involve a slight premium for the assets, analogous to a tender offer where one needs to pay up to get control.

The government, by being the only one who can "buy high and sell low" without putting itself out of business (yet) is the only one who can do this.

I think it will work.

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