You are here

There is Wisdom in TJICistan


As usual, I'm with Travis:

Q: Yes, but can we assume that Travis, as a libertarian / anarchist, is against government intervention?

A: Surprisingly, no, my stance isn’t that simple. The first point I have to make is that despite the above, I don’t understand squat about all of this. Which is much less than most of the folks involved, even if what we have in common is that none of us knows enough to really know all the details.

What happens if a firm goes bankrupt? A lot of the staff is shed, and a huge amount of information disappears. In the wake of that, you can’t find the binders with the right files, you don’t know who to call to find the binders, and no one knows that special detail about loans that were made on February 29th of a leap year. So an orderly wind down (selling the assets, paying down the debts as fairly as possible) becomes much much harder, and may take much much longer.

Say that you’ve deposited $10,000 in a checking account, and you want that money out by September 20th to pay for your kid’s college tuition. If the bank goes bankrupt and all the employees walk out, and the server room is powered down, how long is it going to take to get your $10k back? A while…at best! In this case, one might agree that it’s preferable that the feds come to the bank, loan them $1 million, with a one month due date, and take as security the title to the headquarters building. This keeps everyone employed, and gets you your $10k out in short order (or, maybe $9k … and, yes, I’m ignoring FDIC insurance on purpose).

Absolutely read the whole thing. The “above” to which he refers is a wonderfully understandable abstraction of this very complex current financial situation. Which means it’s not totally understable, but still wonderful enough to make you feel like you understand the score.

Also, from the comments there, Rick Caird adds:

Right now, there is no market for those CDOs that are being used as collateral. Therefore, in a “mark to market” model they have no value. But, we know that they do have value and the value will go up if we can hold them to maturity.

Those who are bringing the CDOs to the government cannot hold them to maturity because they need “cash now”. So, the feds will get these things at pennies on the dollar and the longer the feds hold them, the more valuable they will become. The problem is not that the CDO’s have no intrinsic value, but that there is no market to sell into.

Which sounds a lot like what has had me saying, “Holy Crap.” since I worked through it yesterday.