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Tuesday, September 23, 2008 3:07 PM

Treasury Auction Scam and How To Stop It

Mish Moved to MishTalk.Com Click to Visit.

As more and more details of the Paulson proposal become clear, the smellier the package is.

Today Bernanke admitted the Treasury has no intention of conducting a true reverse auction. Inquiring minds are considering Fed Chairman Bernanke Clarifies Government's $700 Billion Proposal.

"I believe that under the Treasury program, auctions and other mechanisms could be designed 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," said Bernanke.

In further questioning, Bernanke said the $700 billion proposed by Paulson should be "adequate," and argued that a lesser, "underwhelming" amount would only create more problems down the road. It's important to remind the public that this is not a $700 billion "expenditure," but that the auctions from the assets will earn "good value," and potentially even more, he added.
Bernanke is a liar. You know it, I know it, and Bernanke knows it. The idea that taxpayers are going to get "good value" of out $700 billion of pure garbage is insanity, especially if those auctions are rigged.

Conde Nast is reporting Bernanke Gives Up on Reverse Auction Idea.
Under a reverse auction, Treasury wouldn't bid at all. It would circulate a list of assets, and then buy them from whichever bank was willing to sell them for the lowest price.

The way Bernanke sees the auction working, however, it's the other way around: the banks would tender their assets for sale, and then Treasury would put in a bid at what it considers "close to the hold to maturity price".
With thanks to Conde Nast for the link, Clusterstock is reporting CONGRESSIONAL HEARINGS: Bernanke Confirms Government Will Pay Too Much For Crap Assets.
Bernanke wants government to pay significant premium over current "firesale" price for troubled assets. Specifically, he wants to pay close to the "hold-to-maturity" price, which he argues is much higher than the mark-to-market firesale price. Bernanke and Paulson believes this is necessary to get banks to participate.

This is a huge boon to banks and will likely hose taxpayers. Why? Because the government will not have time to figure out what the true "hold to maturity" value of these assets is. Instead, it will have to take the word of banks who have every incentive to dump their crap on taxpayers.

The justification for this is that banks won't participate in the bailout unless you give them big incentive to do so. To which we say: Tough beans. Make the program expensive, as it should be. Give the banks a specified period of time to accept the help or forever forego it. Then work with the banks that jump at the offer.
24/7 WallStreet is reporting Paulson Plan Shows A Weakness: Above Market Pricing, Greater Taxpayer Risk.
What has become clear is that Treasury plans to purchase bad assets from banks at prices very near their original value. The risk to taxpayers under this program would be tremendous. If housing prices continue to fall, so will the value of the paper the government has purchased. Under this set of circumstances the public could be at risk for underwriting the great majority of the Treasury's purchases and never having a chance to recoup their investment.

Buying troubled bank assets at above where they would be valued in a free market now and at a price which is near to the potential price when they mature is a great handout to the banks but undermines almost any chance that the Treasury will ever get any meaningful yield from the bailout.

Taxpayers lose any chance of being made whole.
Stop The Scam

You know what to do. And that is send another fax.

This Is The Entire Fax
Dear Senator

Please stop the Treasury's $700 billion auction scam.

Bernanke lied today before Congress when he stated auctions from assets will earn "good value".

It is clear from Bernanke's testimony that the Treasury's intent is not to buy assets at fair value but any value the Fed and Treasury wants. This puts taxpayers at risk for the full amount of the $700 billion.

This scary provision of the bill must be eliminated:

"(c) Sale of Mortgage-Related Assets.--The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act."

The following scary provision cannot be tolerated as it would allow the Treasury to repeatedly roll over debt at the treasury's discretion ensuring that the entire $700 billion of taxpayer money would be wasted.

Depending on interpretation of the following wording, taxpayer liability may be unlimited.

"Sec. 6. Maximum Amount of Authorized Purchases.
The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time.

Your Name
A Concerned Citizen
(leave your address off, some Senators toss out of state mails)
Fax List

Sen. Richard Shelby (R) 202-224-3416 or 202-224-5137 (try both not sure which is correct)
Sen. Harry Reid (D) 202-224-7327
Sen. John Ensign (R) 202-228-2193
Sen. Jim Bunning (R) 202-228-1373
Sen. Chuck Grassley (R) 202-224-6020

Those inclined should also fax their own senators as well.

Please see Phone And Fax Numbers For All US Senators; More On What To Do for more numbers.

Please send this email to 10 others and have them do the same.
We CAN make a difference

Mike "Mish" Shedlock
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