Hank Paulson's hedge fund (HPHF) has struck again. They are taking a bunch of bad debt off the hands of the U.S.' largest financial firms. No, they're not banks any longer, simply financial firms. Banks are not having troubles like these multinational companies are.
From my understanding, HPHF will buy MBS (mortgage-backed securities) for less than 50 cents on the dollar, sit on them for a year +, and then resell them. Hundreds of billions of dollars will be spent to do this. Luckily, HPHF has an effectively unlimited supply of funds since we are all investors, can afford to hold terrible investments for multiple years, and they do not have to provide any returns to shareholders. Some of these MBS will be bought for 20-30% of their original value. These would be many of the mortgages that originated from 2005-2007. You know the ones, where there is an exhorbitantly high default rate? Yeah, those.
In any event, this plan has just been formulated, and many of the details are still in the minds of HPHF bigwigs. Updates will be a-plenty over the next week, and you can be sure you will receive my next HPHF newsletter.
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I must admit I don't know what to think about this. Past government bailouts have usually turned out to the benefit of taxpayers. In this instance, it's hard to see how it would work. On the other hand, I think it is important to sequester the bad stuff from the rest of the market, just to give it a fighting chance at recovery. Time will tell if it will work. Here's hoping!!