Thursday, September 25, 2008

A different view on the bailout
My analysis suggests that Treasury Secretary Henry Paulson (a former investment banker, no less, not a trader) may pull off the mother of all trades, which could net a trillion dollars and maybe as much as $2.2 trillion -- yes, with a "t" -- for the United States Treasury.

Wouldn't that be wonderful. However, his analysis has a very big problem.

My models suggest that Fannie and Freddie, on the other hand, are a gold mine. For $2 billion in cash up front and some $200 billion in loan guarantees so far, the U.S. government now controls $5.4 trillion in mortgages and mortgage guarantees.

Fannie and Freddie each own around $800 million in mortgage loans, some of them already at discounted values. They also guarantee the credit-worthiness of another $2.2 trillion and $1.6 trillion in mortgage-backed securities. Held to maturity, they may be worth a lot more than Mr. Paulson paid for them. They're called distressed securities for a reason.

They are distressed because people are not making their mortgage payments. Consequently, the only way the government can recoup its investment is to foreclose on these people. What are the odds that the government is actually going to go around foreclosing on delinquent payers?

As an interesting aside, the government is buying something it already legally owns through the right of eminent domain.