So how does this work? (Ben Bernanke talking)
I believe that under the Treasury program, auctions and other mechanisms could be devised that will give the market good information on what the hold-to-maturity price is for a large class of mortgage-related assets. If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.
Good commentary on this by Calculated Risk, Henry Blodget and Paul Krugman.
“Hold-to-maturity” = price I would pay using some excel based calculation like PV or something, using an interest rate, remaining principal and time left on the mortgage.
This does not account for risk that the mortgage will default.
If the Treasury pays hold-to-maturity prices they will overpay, significantly, than market – which has perhaps priced in too much risk, but not by far. The prices are low because there is tremendous risk in there. And the treasury does nothing to mitigate that risk.
In current form, the banks get paid full value, and all the risk is with Treasury (meaning: Taxpayer). Very bad for America. Very good for top management of bank.
Like people argue, the Swedish bank bailout – which told banks to take the write downs and capitalized the banks on the loss, taking equity – is a better deal. But Paulson and Bernanke won’t hear of it. They won’t have too many people to play golf with, if they did.
