Wednesday, October 20, 2010

Circle of Life

Ah hah - you thought that the title "Circle of Life" was going to be related to some interesting New Hampshire wildlife experience I had?  No - I'm thinking of the big headline yesterday about Pimco, Blackrock and the NY Fed pushing to putback faulty mortgage backed securities to Bank of America.

Now, it's not that I don't want BAC to have to buyback fraudulent or faulty crap that they created - I do - but the NY Fed's involvement?  What will happen? The NY Fed will put this crap back to BAC, which will result in BAC spending all their money and needing another bailout, which will then be provided by... that's right - you're one step ahead of me this morning - THE NEW YORK FED!   The circle of life.  Beautiful.

The other story bugging me this morning is the absurd spin-job "Wall Street Bailout returns 8.2%, beating Treasury bonds."

"The U.S. government’s bailout of financial firms through the Troubled Asset Relief Program provided taxpayers with higher returns than they could have made buying 30-year Treasury bonds -- enough money to fund the Securities and Exchange Commission for the next two decades. 

The government has earned $25.2 billion on its investment of $309 billion in banks and insurance companies, an 8.2 percent return over two years, according to data compiled by Bloomberg. That beat U.S. Treasuries, high-yield savings accounts, money- market funds and certificates of deposit. Investing in the stock market or gold would have paid off better."

I'm not going to spend a ton of time on this one, but to say that the investment was "$309B" is flat out ludicrous.  You can think up your own analogy, but the one I'm thinking of is if you bought stock in a factory, perhaps, for $1B.  Then you spend another $5B buying everything that the factory produces, and thus your "stock" investment turned a profit of $100M.  "Hey look - I have a $100MM profit on a $1B investment!"  You boast - only your true investment was much more than $1B.
Now, that analogy isn't perfect, obviously, as the Treasury/Fed won't lose all of the other money they've invested (the TRILLION they've spent buying MBS and Treasuries, for example) - they might not even lose any of it.  But it's still Ponzi math to high five and annualize returns based on the equity portion.  We won't even get into the intangible effects of the bailouts (savers earning 0%, asset price inflation, moral hazard, etc).



Onlooker said...

Yes, the spin on this crap is nauseating. The obvious retort is then why don't we just do more of it ad infinitum? We could solve the whole deficit/debt problem, right? Ugh

Kid Dynamite said...

onlooker - we ARE! see: QE2!

Onlooker said...

Yeah, I hear ya. We'll all be rich before this is over, right?!