Oct 07, 2008 @ 04:35 pm
NEW YORK - Two things rule the financial world: Making money and figuring out ways to make more of it. That's why some on Wall Street are sure to figure out how to profit from the U.S. government's $700 billion financial bailout plan.
Despite its 451-page length, details so far are sparse on the just-signed emergency rescue for the financial system. We do know that banks and other institutions will be able to sell their distressed assets to the government, however, maybe for more than what they could get in the market right now.
Hedge funds and sovereign wealth funds won't get access to the taxpayer-funded till. They could find a back door to sell their toxic assets to the government, though.
This could be one unintended consequence of the bailout plan that was signed by President Bush on Friday. It shouldn't surprise anyone--the smart people on Wall Street are always looking for new avenues to profit, which often happens by testing boundaries and pushing limits.
That's sort of what got us into this current financial meltdown. Banks and other financial firms built huge portfolios of assets tied to risky mortgages, without recognizing--or ignoring--the potential downside should home prices fall and foreclosures surge.
When the housing market boomed, they made out big. Now that it has collapsed, they have been forced to take multibillion dollar writedowns. Some banks folded. Others needed to be rescued by the government or rivals.
The contagion from this has caused a crisis of confidence in the banking system and lending has frozen between banks and other banks, and to businesses and people.
The primary goal of the massive bailout is to buy the bad mortgages and other devalued assets held by troubled financial institutions, thereby inducing them to lend again to businesses and consumers. The banks have struggled to sell those the toxic debt--for some, the market has disappeared while others just don't like the price that they could get.
The firms that can sell to the U.S. Treasury include banks, savings associations, credit unions, securities brokers or dealers or insurance companies that are based in the United States or have significant U.S. operations.
It's unknown how much the Treasury will pay for such assets. Bill Gross, chief investment officer and founder of the well regarded Pacific Investment Management Co., estimates that the government will pay on average about 65 cents on the dollar for mortgage securities. That would be about a third less than the original purchase price to the seller.
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