With the Obama Administration's comprehensive plan to deal with toxic assets just days away, trial balloons are being floated about Washington. The most popular framework being bandied about is to create a "bad bank" to purchase the toxic mortgage backed securities and other assets off bank's balance sheets. This would hopefully encourage more private investment in these banks which in turn would provide banks with confidence to lend again.
I was taken aback by this Reuters article that suggests the cost to purchase these assets could reach up to $4 trillion (yes, you are reading that number right). The Wall Street Journal tonight puts the number closer to $2 trillion. Obviously the hope would be that these assets could be sold at a later date at a price at or above the government's purchase price, so the cost would be significantly less. Regardless the government would still need to come up with that money to purchase these assets and effectively recapitalize the banking system.
Now that we have reached the stage of talking about multi-trillion dollar bailout plans, I am reminded of that wonderful scene in Austin Powers International Man of Mystery where Dr. Evil is plotting to force the world community to pay him a ransom. Here it is:
Dr. Evil: ...we hold the world ransom for... ONE MILLION DOLLARS!
Number Two: Don't you think we should ask for *more* than a million dollars? A million dollars isn't exactly a lot of money these days. Virtucon alone makes over 9 billion dollars a year!
These numbers being tossed around today are so outside the realm of belief. I came across this lead-in from October, just three months ago:
WASHINGTON (CNN) -- House Republicans on Monday objected to new spending measures that congressional Democrats are considering as they draft a $150 billion economic stimulus package.
- Given the size of the remedies being proposed, the state of the financial system must actually be much worse than what most people believe (or this will go down as the biggest overreaction in history).
- When do we start talking about how we are going to pay back this mountain of debt that our children and grandchildren will be inheriting?
- Tomorrow will be an interesting day in the stock market.