Tuesday, September 23, 2008

We're from the government, and we're here to help!

(WSJ MarketBeat) Investors voted with their wallets today, removing funds from the equity and credit markets as the testimonies of the Committee to (Save? Ruin?) the World (Fed Chairman Ben Bernanke, Treasury Secretary Hank Paulson, and SEC Chairman Christopher Cox) wore on and various senators expressed skepticism of the $700 billion garbage barge trust.

In part, what soured people on the Treasury proposal was a bit of detail out of Mr. Bernanke, who said the Treasury’s plan would be to buy assets at “hold-to-maturity” levels, rather than at “fire sale” prices. Assuming — as many Wall Street firms did over the last few years — that the underlying mortgages of these debt securities would not perform as poorly as the current prices suggest, the Treasury would make money on this over time, while freeing the banks’ balance sheets and providing them adequate capital.

Bargain-basement prices for this mortgage-backed junk would not help banks adequately recapitalize. Still, analysts reacted with some derision. “We would rather see Treasury buy the assets cheap and use the remainder of the funds infused into the financial institution to buy preferred stock,” writes Len Blum, managing director at Westwood Capital.

The proximity to the election complicates the issue further. David Ader, government-bond strategist at RBS Greenwich Capital, notes that it is a politically difficult sell to go to voters and tell them you’re proud to have kept employed “many of the same firms that created the mess and paying more for their crappy securities than they themselves would be willing to pay. Vote for me.”

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