Sunday, October 12, 2008

$700 Billion? So What?

Guaranteeing an asset is equivalent to buying the asset while giving the seller an option to repurchase at the same price. Conversely, buying an asset is equivalent to guaranteeing the asset while retaining an option to purchase at the guarantee price. (The proof is left as an exercise for the reader.)

When Secretary Paulson first proposed the TARP, it was a plan to buy $700 billion worth of assets from banks. Some valid criticisms were made – for example, that the program would do nothing to help recapitalize banks unless the Treasury deliberately overpaid for the assets. But the criticism that seemed to resonate most with the general public was that taxpayers would be “spending” $700 billion (a huge amount even compared to the already historically large budget deficit) to “bail out” the banks.

Suppose instead that Secretary Paulson had proposed guaranteeing $700 billion dollars worth of bank assets – at some appraised value – in exchange for call options on those assets. That’s equivalent to what he actually proposed, but it might have been met with considerably less hostility.

The FDIC already guarantees several trillion dollars worth of deposits (depositors’ assets), at face value, in exchange for a small insurance premium. Guaranteeing a mere $700 billion worth of assets, at a more realistic appraised value that takes into account the probability of default (analogous to the probability of bank failure in the case of deposits), in exchange for a rather valuable call option that will pay off handsomely if the default rate is less than expected (an option which could presumably be sold on the open market, though it may be more valuable to the government, with its large capacity to absorb risks, than to private owners)? That hardly seems like a big deal, and it doesn’t seem to involve any “expense” of taxpayer money – at least not in the short run.

There is, of course, a risk to the taxpayers, just as there already was for the FDIC. The theoretical worst case scenario for the TARP – a loss of $700 billion – is not nearly as bad as the theoretical worst case scenario for the FDIC – an obligatory public bailout costing several trillion dollars.

One may, of course, have valid criticisms for this “equivalent TARP” (“Troubled Assets Guarantee Sytem” maybe – “TAGS”) – the same as the valid criticisms of the actual TARP. Again, the TAGS does nothing to recapitalize banks unless the appraisals are deliberately inflated.

But if the problem – as Secretary Paulson originally seemed to maintain – was just liquidity, then the TAGS would solve it. Assets guaranteed directly by the Treasury are almost as good collateral as direct liabilities of the Treasury, so banks – even suspect banks – would be able to borrow against the guaranteed assets at reasonable interest rates whenever they needed money. They might run out of collateral, but in that case, the bank must have been undercapitalized in the first place.

There are a lot of details to be worked out. For example, what would the TAGS guarantee? Resale value? Reovery value? And how much time has to pass before the guarantee applies? And if an asset is sold, does the call option attach to the asset, or is the original bank on the hook for the option? And so on and so forth. The whole exercise is academic, since Congress has now passed a different version of the TARP. I just wanted to make the point that the TARP was not (and is not) as big a deal as the $700 billion figure makes it sound.

30 Comments:

Anonymous Anonymous said...

Troubled assets are, almost by definition, losing bets on certain types of economic activity. So there is no upside to these guarantees. It is all downside risk.

So basically any other type of investment by the government is more economically desirable. Simply not borrowing the money is a better macroeconomic investment than this. Because people in the general economy will have more "money" and can use to do something other than support condo prices in Florida.

Mon Oct 13, 09:45:00 AM EDT  
Anonymous Anonymous said...

The first anonymous is not completely correct. Troubled assets are almost always a losing bet for a bettor that has a short time horizon. Troubled assets, should they be solvent at all, are not a poor bet for the long haul. Rather, if the govt holds assets that cannot otherwise be sold or priced in the market now, but which stay solvent, they will almost surely pay a low price now and gain a benefit when they do sell these assets later. Of course, this is the govt we are talking about, so that's not a small order. Nonetheless, the issue is certainly about the solvency. While buying some of these assets would help solvency of the "non-troubled" portion of banks' balance sheets, I find it dubious that the buying of easily identified troubled assets would be the tipping point for those companies between solvency and insolvency. Rather, I think their debt ratios are so high already that this would still result in insolvencies nonetheless.

Mon Oct 13, 10:38:00 AM EDT  
Blogger knzn said...

Troubled assets are, almost by definition, losing bets on certain types of economic activity.

They are, by definition, bets that have already been recognized to have a substantial chance of losing. Any reasonable appraisal of such an asset would take into account what is already known about that chance of losing.


So there is no upside to these guarantees. It is all downside risk.

There is an upside in the call option that the government would get under my proposal. (Did you read that part?)

Say a mortgage has a face value of $100,000 a 50% chance of defaulting. To simplify the example, let's say this means it will sell for 50% of face value. (In reality it would be less than 50% of face value, because of risk aversion.) The government appraises it at $50,000, guarantees it at that price, and takes a call option with that price as the strike price. If the mortgage defaults, the guarantee kicks in, and the government is down $50,000. If it goes to maturity without defaulting, it's worth $100,000; the government exercises its call option and pockets the $50,000 difference.

In real life (assuming the appraisals are reasonable), the odds for the government are better than in my example, because investors are risk averse. The appraised value of the mortgage should be closer to, maybe, $40,000, to compensate the holder for the uncertainty. Then the government has a 50% chance of losing $40,000 and a 50% chance of making $60,000.

Mon Oct 13, 10:50:00 AM EDT  
Blogger knzn said...

I see the second anonymous has also made the point in my previous comment.

Regarding the solvency issue, as I said in the post, a legitimate criticism of either the TARP or the TAGS is that they do nothing to help with capitalization problems. (Actually, the TARP in its present form does help, but only because more recent revisions give the Treasury the opportunity to inject capital directly.) There has been dispute over whether the main problem was capital or liquidity. I think the consensus has come pretty strongly toward the former, but a few weeks ago it was still respectable to argue that it was mostly a liquidity problem.

Mon Oct 13, 10:56:00 AM EDT  
Anonymous Anonymous said...

Found a way to recover those 700 billion dollar:

http://www.700billiondollarhomepage.com

Tue Oct 14, 05:56:00 PM EDT  
Anonymous Anonymous said...

"Guaranteeing an asset is equivalent to buying the asset while giving the seller an option to repurchase at the same price. Conversely, buying an asset is equivalent to guaranteeing the asset while retaining an option to purchase at the guarantee price."

Not quite. You've left out the risk free asset. You have to short it in the first and buy it in the second to get equivalence. I'll leave the proof to you.

Tue Oct 28, 07:59:00 PM EDT  
Anonymous Anonymous said...

看房子,買房子,建商自售,自售,台北新成屋,台北豪宅,新成屋,豪宅,美髮儀器,美髮,儀器,髮型,EMBA,MBA,學位,EMBA,專業認證,認證課程,博士學位,DBA,PHD,在職進修,碩士學位,推廣教育,DBA,進修課程,碩士學位,網路廣告,關鍵字廣告,關鍵字,廣告,課程介紹,學分班,文憑,牛樟芝,段木,牛樟菇,日式料理, 台北居酒屋,燒肉,結婚,婚宴場地,推車飲茶,港式點心,尾牙春酒,台北住宿,國內訂房,台北HOTEL,台北婚宴,飯店優惠,台北結婚,婚宴場地,推車飲茶,港式點心,尾牙春酒,住宿,訂房,HOTEL,飯店,造型系列,學位,牛樟芝,腦磷脂,磷脂絲胺酸,SEO,婚宴,捷運,學區,美髮,儀器,髮型,牛樟芝,腦磷脂,磷脂絲胺酸,看房子,買房子,建商自售,自售,房子,捷運,學區,台北新成屋,台北豪宅,新成屋,豪宅,學位,碩士學位,進修,在職進修, 課程,教育,學位,證照,mba,文憑,學分班,網路廣告,關鍵字廣告,關鍵字,SEO,关键词,网络广告,关键词广告,SEO,关键词,网络广告,关键词广告,SEO,台北住宿,國內訂房,台北HOTEL,台北婚宴,飯店優惠,住宿,訂房,HOTEL,飯店,婚宴,台北住宿,國內訂房,台北HOTEL,台北婚宴,飯店優惠,住宿,訂房,HOTEL,飯店,婚宴,台北住宿,國內訂房,台北HOTEL,台北婚宴,飯店優惠,住宿,訂房,HOTEL,飯店,婚宴,結婚,婚宴場地,推車飲茶,港式點心,尾牙春酒,台北結婚,婚宴場地,推車飲茶,港式點心,尾牙春酒,結婚,婚宴場地,推車飲茶,港式點心,尾牙春酒,台北結婚,婚宴場地,推車飲茶,港式點心,尾牙春酒,結婚,婚宴場地,推車飲茶,港式點心,尾牙春酒,台北結婚,婚宴場地,推車飲茶,港式點心,尾牙春酒,居酒屋,燒烤,美髮,儀器,髮型,美髮,儀器,髮型,美髮,儀器,髮型,美髮,儀器,髮型,小套房,小套房,進修,在職進修,留學,證照,MBA,EMBA,留學,MBA,EMBA,留學,進修,在職進修,牛樟芝,段木,牛樟菇,住宿,民宿,飯宿,旅遊,住宿,民宿,飯宿,旅遊,住宿,民宿,飯宿,旅遊,住宿,民宿,飯宿,旅遊,住宿,民宿,飯宿,旅遊,住宿,民宿,飯宿,旅遊,住宿,民宿,飯宿,旅遊,美容,美髮,整形,造型,美容,美髮,整形,造型,美容,美髮,整形,造型,美容,美髮,整形,造型,美容,美髮,整形,造型,美容,美髮,整形,造型,美容,美髮,整形,造型,設計,室內設計,裝潢,房地產,設計,室內設計,裝潢,房地產,設計,室內設計,裝潢,房地產,設計,室內設計,裝潢,房地產,設計,室內設計,裝潢,房地產,設計,室內設計,裝潢,房地產,設計,室內設計,裝潢,房地產,設計,室內設計,裝潢,房地產,進修,在職進修,MBA,EMBA,進修,在職進修,MBA,EMBA,進修,在職進修,MBA,EMBA,進修,在職進修,MBA,EMBA,進修,在職進修,MBA,EMBA,進修,在職進修,MBA,EMBA,進修,在職進修,MBA,EMBA,住宿,民宿,飯店,旅遊,美容,美髮,整形,造型,設計,室內設計,裝潢,房地產,進修,在職進修,MBA,EMBA

Sun Mar 08, 11:11:00 AM EDT  
Anonymous Anonymous said...

福~
「朵
語‧,最一件事,就。好,你西.............................................................................................................
..................

Thu Apr 02, 11:36:00 AM EDT  
Anonymous Anonymous said...

酒店喝酒,禮服店,酒店小姐,酒店領檯,便服店,鋼琴酒吧,酒店兼職,酒店兼差,酒店打工,伴唱小姐,暑假打工,酒店上班,酒店兼職,ktv酒店,酒店,酒店公關,酒店兼差,酒店上班,酒店打工,禮服酒店,禮服店,酒店小姐,酒店兼差,暑假打工,酒店經紀,台北酒店,禮服店 ,酒店小姐,酒店經紀,酒店兼差,寒假打工,酒店小姐,台北酒店,禮服店 ,酒店小姐,酒店經紀,酒店兼差,暑假打工,酒店小姐,台北酒店,禮服店 ,酒店小姐,酒店經紀,酒店兼差,寒假打工,台北酒店,禮服店 ,酒店小姐,酒店經紀,酒店兼差,暑假打工,酒店小姐,台北酒店,禮服店 ,酒店小姐,酒店兼差,暑假打工,酒店小姐,台北酒店,禮服店 ,酒店小姐,酒店經紀,酒店兼差,寒假打工,酒店小姐,台北酒店,禮服店 ,酒店小姐,酒店經紀,酒店兼差,暑假打工,酒店小姐,台北酒店,禮服店 ,酒店小姐,酒店經紀,酒店兼差,寒假打工,酒店小姐,台北酒店,禮服店 ,酒店小姐,酒店經紀,酒店兼差,暑假打工,酒店小姐,禮服店 ,酒店小姐,酒店經紀,酒店兼差,寒假打工,酒店小姐,禮服店 ,酒店小姐,酒店經紀,酒店兼差,暑假打工,酒店小姐,禮服店 ,酒店小姐,酒店經紀,酒店兼差,寒假打工,酒店小姐,禮服店 ,酒店小姐,酒店經紀,酒店兼差,暑假打工,酒店小姐,酒店傳播,酒店經紀人,酒店,酒店,酒店,酒店 ,禮服店 , 酒店小姐,酒店經紀,酒店兼差,暑假打工,招待所,酒店小姐,酒店兼差,寒假打工,酒店上班,暑假打工,酒店公關,酒店兼職,禮服店 , 酒店小姐 ,酒店經紀 ,酒店兼差,暑假打工,酒店,酒店,酒店經紀,酒店領檯 ,禮服店 ,酒店小姐 ,酒店經紀 ,酒店兼差,暑假打工, 酒店上班,禮服店 ,酒店小姐 ,酒店經紀 ,酒店兼差,暑假打工, 酒店上班,禮服店 ,酒店小姐 ,酒店經紀 ,酒店兼差,暑假打工, 酒店上班,酒店經紀

Mon Apr 20, 10:17:00 PM EDT  
Blogger kiloi said...

puma mens shoes
nike air max ltd
NIKE air shoes
ed hardy clothing ed hardy clothes ed hardy shirtsed hardy clothing ed hardy clothes

Wed May 13, 05:09:00 AM EDT  
Blogger kiloi said...

nike tnEnter the necessary language
translation, up to 200 bytes winter, moves frequently in Chinanike chaussures showing that the deep strategy of the Chinese market. Harvard Business School, tn chaussures according to the relevant survey data show that in recent years the Chinese market three brands, Adidas, Li Ning market share at 21 percent, respectively, a

Wed May 13, 05:10:00 AM EDT  
Blogger kiloi said...

Puma shoes , Ugg Boots , nike max shoes, NIKE AIR MAX TN ,nike max shoes ,PUMA CHAUSSURES, NIKE SHOX Torch ,puma Ferrari F1 ,PUMA DRIFT CATmens clothing men's sweate, cheap columbia jackets, lacoste sweater, ralph lauren polo shirts,ski clothing. Free Shipping, PayPal Payment. Enjoy your shopping experience on mensclothingstore.Us

Wed May 13, 05:10:00 AM EDT  
Blogger kiloi said...

chaussures puma stores offer you the most popular fashion shoes, including the puma basketpuma puma BanXie and shoes. All the puma product factory direct sale, special processing, create the most inexpensive puma stores.National Weather Service Meteorologist Jason puma CAT said this week's temperatures will mirror

Wed May 13, 05:10:00 AM EDT  
Blogger kiloi said...

polo shirtsLacoste polo shirtsralph lauren polo shirts chaussure pumachaussure sport chaussure nike ugg boots
cheap ugg boots
black ugg boots

Wed May 13, 05:10:00 AM EDT  
Blogger kiloi said...

puma mens shoes
nike air max ltd
NIKE air shoes
ed hardy clothing ed hardy clothes ed hardy shirtsed hardy clothing ed hardy clothesed hardy shirts

Wed May 13, 05:10:00 AM EDT  
Blogger sea said...

polo ralph lauren
cheap lacoste polo shirts
burberry poloscheappolos
polo fashion

Wed May 13, 09:41:00 PM EDT  
Blogger Talia.float said...

Bought the Tennis Racquet is important, exercise can reduce the harm, especially for the wrist injury. But the good of Tennis Racket in general in the real prices are more expensive, so a lot of websites now have cheap tennis racquet,tennis racquet discount,cheap tennis racket,discount Tennis Racket .

Mon May 18, 11:38:00 PM EDT  
Blogger Talia.float said...

head junior tennis racketwilson tennis racquet
wilson tennis racket
head tennis racketbabolat tennis racket

Mon May 18, 11:39:00 PM EDT  
Blogger how to buy air shoes said...

Some new style Puma Speed is in fashion this year. chaussure puma is Puma Shoes in french. Many france like seach “chaussure sport” by the internet when they need buy the Puma shoes or buy the nike max shoes.The information age is really convenient. By the way ,the puma CAT is really good chaussures puma ,don’t forget buy the puma mens shoes and nike air max ltd by the internet when you need them . Do you know Nike Air Shoes is a best Air Shoes .

Spring is coming, and how to choose the polo shirts is the main concern of many people. ralph lauren polo shirts is a classic type and reliable. ed hardy clothing is more in line with the aesthetic ideas of young people, so many young people filled with a variety of ed hardy clothes in their wardrobes. New style ed hardy womens shirt match the new style ed hardy sunglasses , it is a good idea.
Do you think this season is not for ugg boots ? maybe yes .but this season is best time that can buy the cheap ugg boots. Many sellers are selling discounted. Do not miss . Please view my blog and fc2 blog .thank you .

Tue May 19, 04:55:00 AM EDT  
Anonymous Anonymous said...

Do you wannaghd hair straighteners for you own , we have many
cheap ghd hair straightenersin style and great,you can choose one from these
hair straighteners
Authentic chaussure puma
chaussure sport
And chaussure nike shoes
Come here to have a look of our Wholesale Jeans
Many fashionMens Jeans ,eye-catching
Womens Jeans ,and special out standing
Blue Jeans ,you can spend less money on our
Discount Jeans but gain really fine jeans, absolutely a great bargain.
www.crazypurchase.com
China Wholesale
wholesale from china
buy products wholesale
China Wholesalers
http://weddingdressseason.com

Mon Jun 08, 02:15:00 AM EDT  
Blogger wow power leveling said...

cheap wow gold buy wow power leveling my wow gold cheapest wow power leveling
replica replica rolex
CHEAP wow power level
BUY power leveling
replica rolex replica
cheap lotro gold
replica rolex
CHEAPEST power leveling
cheap rs gold l

Tue Jun 09, 11:08:00 PM EDT  
Blogger zero said...

翻譯|醫學美容|汽車報廢|童裝批發|家教|室內裝潢|徵信|清境民宿|催情性藥品

Fri Aug 21, 03:46:00 AM EDT  
Blogger poston said...

wholesale gemstone jewelry
wholesale crystal jewelry
crystal wholesale
rock crystal


crystal jewelry
wholesale jewelry
jewelry wholesale
cheap jewelry

Sun Sep 27, 10:58:00 PM EDT  
Blogger beautiful said...

牙醫,植牙,矯正,矯正牙齒批發,皮膚科,痘痘,中醫,飛梭雷射,毛孔粗大,醫學美容,痘痘,肉毒桿菌,seo,關鍵字行銷,自然排序,網路行銷,自然排序,關鍵字行銷seo,部落格行銷,網路行銷,seo,關鍵字行銷,自然排序,部落格行銷,網路行銷,牛舌餅婚紗台中婚紗,腳臭,腳臭,腳臭,腳臭,腳臭,腳臭,腳臭,腳臭,高雄婚紗,街舞,小產,雞精,性感,辣妹,雷射溶脂,雙下巴,抽脂,瘦小腹,微晶瓷,電波拉皮,淨膚雷射,清潔公司,居家清潔,牙周病,牙齒矯正,植牙

Fri Nov 06, 01:41:00 AM EST  
Blogger didi said...

情趣用品,情趣,
按摩棒,電動按摩棒,
IC按摩棒,IO按摩棒,
G點,後庭,
AV女優,AV,
跳蛋,無線跳蛋,
變頻跳蛋,數位跳蛋,
跳蛋,跳蛋,
潤滑油,情趣精品,
SM,吊帶襪,
馬甲,角色扮演服,
角色扮演,充氣娃娃,
貓裝,絲襪,
褲襪,性感絲襪,
性感睡衣,睡衣,
自慰器,自慰器,
爆漿,自慰杯,
做愛,電動自慰器,
威而柔,高潮,
逼真按摩棒,振動按摩棒 ,
按摩棒,按摩棒,

Mon Mar 01, 09:53:00 AM EST  
Blogger my blog said...

I love your blog very much,and i also want to introduce my products to all of you,them are nice and very fashion,if you like them,please contact us on our

website or eamil us,thks very much for your attention.And this is my products below:
authentic gucci bags, gucci boots outlet
cheap gucci shoes, discount Gucci bags
newest gucci handbags, gucci handbags 2010
Juicy couture, authentic Juicy bags
Juicy handbags outlet, tiffany 2010
Tiffany, tiffany outlet
discount tiffany charms, cheap tiffany Bangles
Armani watches outlet, watch wholesale
discount DG watches, cheap Chanel watches
newest GUCCI watches, discount ghds
ghd outlet, ghd
cheap ghd, ghd straighteners
wholesale edhardy t shirt, Moncler
Moncler jackets, cheap Moncler coats
Moncler Vest, Moncler outlet
moncler polo t shirt, MBT boots
MBT shoes in fashion, cheap mbt shoes sale
discount mbt outlet 2010, MBT Walking Shoes
Mtb shoes,Moncler
Moncler jackets,Moncler coats
Moncler Vest,Moncler outlet
discount moncler Tshirt

Wed Apr 14, 05:15:00 AM EDT  
Anonymous Anonymous said...

i dont know if there suitalbe to write something good website i meet here, for i hope every body could have a good shopping experience online.

here i want to introduce this website, mainly selling nfl jerseys,
ghd, christian louboutin, and air max 95.

they offer 24 hours online service, and very very good customer service.
i buy the air max 90 shoes online on the website, nice design and good quality. that is why i strongly introduce you here.

it is not a advertisment, just share my shopping experience with everybody. hope you have a nice day, and could enjoy the good shopping.

Wed Aug 11, 04:32:00 AM EDT  
Anonymous Anonymous said...

網頁設計FreeForm徵信,翻譯,外遇電扇電風扇涼風扇,酒瓶雕刻禮贈品禮品贈品

Mon Aug 16, 10:26:00 PM EDT  
Blogger 魅惑 said...

徵信 徵信社 徵信公司
徵信 徵信社 徵信公司徵信 徵信社 徵信公司 徵信 徵信社 徵信公司
徵信 徵信社 徵信公司 徵信 徵信社 徵信公司徵信 徵信社 徵信公司 徵信 徵信社 徵信公司徵信 徵信社 徵信公司 徵信 徵信社 徵信公司徵信 徵信社 徵信公司 徵信 徵信社 徵信公司徵信 徵信社 徵信公司 徵信 徵信社 徵信公司徵信 徵信社 徵信公司 徵信 徵信社 徵信公司 徵信 徵信社 徵信公司 徵信 徵信社 徵信公司徵信 徵信社 徵信公司 徵信 徵信社 徵信公司徵信 徵信社 徵信公司

Mon May 23, 05:56:00 AM EDT  
Blogger qinbincai123 said...

Your forever friend gets you through the haoxiod81 hard times,the sad times,and the confused times.
Cheap Snapback Hats
Cheap New Era Hats
Wholesale New Era Hats
Wholesale 59fifty Hats
Monster Energy Hats

Tue Apr 24, 10:57:00 PM EDT  

Post a Comment

Links to this post:

Create a Link

<< Home