Mr. Bernanke says he wants to hold the securities purchased in the bail out until maturity, but how much will they be worth at that point? Via Bloomberg: Paulson, Bernanke Put Bank Aid Ahead of Best Deal
“I am not advocating that the government intentionally overpay,” Bernanke told the Joint Economic Committee today, in response to a question from U.S. Rep. Jim Saxton, a New Jersey Republican.
At the same time, Bernanke also repeated his view that the government won’t pay “fire-sale prices” for the mainly mortgage-related securities Paulson aims to buy in a proposed $700 billion rescue. Officials want to set a long-term value on assets, holding them until they mature or markets improve.
To predict what such a scenario will look like involves answering a number of questions that are far from scientific…this is where the “art” of finance comes into play.
What will the world look like when the markets improve? Will the real estate market rebound? Will the global de-coupling thesis take hold with foreign economies pulling the U.S. out of a shallow recession? How much will losses be in the meantime? What discount rate should apply to such a set of cash flows? Just how successful will these bailout measures be if all previous actions have not slowed down the crisis?
These and literally hundreds of other assumptions will go into the valuation of the securities that Mr. Paulson and Mr. Bernanke are suggesting that we will purchase from banks at a price above the current market value.
The failure to properly value these securities by some of the smartest minds in the world and the collective wisdom of the markets has brought us to where we are today.
Why do we think Mr. Bernanke is a better artist?
The unfortunate result of the bailout will likely be losses for the American taxpayer. And without my suggestion below that we take an ownership stake in the companies we aid, the direct benefit of these purchases will accrue to the companies we aid.
However, it is important to also realize that if we can be confident that his this manoevre will avert greater financial disaster, we will collectively benefit from a shallower recession. This will provide an economic benefit to society as a whole, and this is what the administration is banking on.
One thing is clear: we should not expect to get out of this taxpayer losses if this bailout measure is approved. Being honest with these challenges is important as Americans wrestle with how they feel about the current proposals…and let’s hope that Mr. Bernanke is good at Art.