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Re: WORTH BREADING How big a bailout?
From: David Farber <dave () farber net>
Date: Sat, 20 Sep 2008 12:52:55 -0400



Begin forwarded message:

From: "Gerry Faulhaber" <gerry-faulhaber () mchsi com>
Date: September 20, 2008 9:18:04 AM EDT
To: <dave () farber net>
Subject: Re: [IP] How big a bailout?

The question of the hour, David. Even as we speak, Bernanke (Fed) and Poulson (Treasury) are preparing a plan to put before Congress; we don't know the details of this yet, but the overall outline is clear. The government will set up something like the Resolution Trust Corp to take questionable debt off of bank balance sheets and individually "work out" the loans. This is what it did in 1989 to resolve the savings and loan debacle.

The idea is that "many" AAA mortgage-backed securities have in fact turned out to be non-performing, and no one knows how many are bum loans or how extensive the problem is. No one wants to do business with a bank that may go under at any time, leaving the counterparties (i.e., other banks on the other side of transactions) holding the bag. So, banks can't raise money, etc., etc. (Read the excellent IP post with the explanation by Doug Diamond and Anil Kashyap).

What must be done? Well, many if not most of these mortgages behind these securities are probably just fine, and will be repaid. Some will probably end up paying part of what they owe, and some will just be complete write-offs. But we don't know that until we do the individual work outs. While the nunber of a half trillion dollars is being bandied about, this is the amount of questionable debt that the government may have to take over. How much money they can get back from these instruments is another question, and one we can't answer at this moment. During its lifetijme, the Resolution Trust Corp closed or resolved S&Ls with assets over $375 billion. It was able to achieve strong returns while holding these assets and eventually recover much of their value. Unfortunately, I cannot give you hard numbers about their recovery rate.

Professor Emeritus Gerald Faulhaber
Wharton. School, University of Pennsylvania

----- Original Message ----- From: "David Farber" <dave () farber net>
To: "ip" <ip () v2 listbox com>
Sent: Saturday, September 20, 2008 5:26 AM
Subject: [IP] How big a bailout?




Begin forwarded message:

From: "David Lesher" <wb8foz () panix com>
Date: September 19, 2008 11:13:11 PM EDT
To: dave () farber net (David Farber)
Subject: How big a bailout?

Prof F:

I'm wondering how deep in the hole we are all going
on these bailouts.

Can we compare it to the Resolution Trust Corp?
How much money was plowed into it;
how much was recovered?





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