I will return to this subject later, when I have more time, but the issue of overpaying on bank assets under the Geithner plan is much more complex than meets the eye ... ah, so many wrinkles! I'm now wavering on how much overpayment we may see -- it may be considerable after all. See this blog entry (very wonky) for a scenario that's actually real world (unlike the misleading simple models that were floating around, like Krugman's), though it contains assumptions that may turn out not to be true. Also I think there's a "cost of money" element that could cause bids to come in higher that no one is modelling yet (everyone's looking at the risk angle).
So are banks still secretly terrified of the Geithner plan (preceding entry)? I still think probably yes, but I'm going to return to that subject sometime later. First I want to do a blog entry on the private investor advantage of "free money" and how that may skew the offered prices.
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Hey! Great blog!
ReplyDeleteI made that entry for some friends who wanted a non-mathy approach to understand the plan. I re-worked it to make some educated guesses based on suggestions from commenters that hedge funds will bid to a 12% gain on their investment and that leverage will play out so they have 1/5th skin in the game (instead of 1/7th).
http://rortybomb.wordpress.com/2009/03/26/making-a-prediction/
I'd be curious as to your thoughts.
These things are difficult to value, but not impossible. My suspicion, as is your guess in entries below, is that the stress tests are coming back with terrible, terrible results, but that Obama can't nationalize them without some more time for legal reasons, and the cover of a market failing on the popular front.
Interesting times!