The Way Through A $700B Mess

I guess we finally know how much money it takes to get the attention of congress.

$700B

That's how much the Secretary of the Treasury (Henry Paulson) is asking the U.S. Congress to approve for him to use in buying up "toxic" assets?

What are these assets?

At the core they are home mortages – lots of them. Up until the past year they've been a pretty safe bet. But it seems now that a lot of mortages were given to people under somewhat deceptive or shady circumstances. Now that the people who took out the mortgages can no longer make the payments, the mortages themselves have less value.

This caused the problem in banking and finance because these mortgages were bundled together, the good with the bad, and sold among financial institutions around the world. The bundles ended up getting rebundled several times, so now no one knows whats really in these bundled packages.

There is likely a lot of good debt in with the bad, but it's going to take time to unravel it all.

So the plan for our $700B is buy all this stuff up at a cheap price to take them off the hands of the financial institutions that are hanging on to them now, which should restore confidence in the foundations of our financial system. Then the government (nominally, us) would have time to tease out the good stuff from the bad and sell that back to the markets at a profit.

At least, that's the way it's supposed to work.

There are too many unknowns in this equation to make me completely comfortable with it, but more experienced financial folks than I see this as the best way forward. It may be the best, but I don't think anybody believes it's great.

In the world view, it's one more event that takes us down a notch in the amount of confidence the world has in us to "do the right thing".

A few years back a friend of mine defended our overseas actions and the treatment of prisoners we captured by saying, "they would be doing the same thing to us if they had the chance."

My response is, "yeah, but we're supposed to be the good guys".

At any rate, with the markets at a high volatility right now we're in peroid of higher risk/reward ration. I took a look at Fannie Mae (FNM) the other night and saw that some simple call options would be quite profitable. It's been a few days, but there still may be something there to work with as it seems to be continuing to recover.