Monday, October 6, 2008

Wall Street May Reject The Bail Out

The Guardian is reporting that Wall Street may shun the $700 Billion bail out. Banks and financial firms may chose not to sell to the government to avoid all the strings that come with the sale.

Lack of participating could have two effects. The first is that the markets may react as if the bill never passed plus/minus the effects of trying in the first place along with reacting to the other provisions in the bill. That does not necessarily mean a negative impact. The second is that the markets could react as if the bill was executed without it actually being so.

If the government is willing to buy these so called worthless assets, that in it self can give them a value. If they have a value, banks and financial firms can start trading, selling, buying, and generally give them a value to put on their books. Thus, even without the government actually buying them the willingness could restart the market. In the same way, only a few companies need to participate for the bail out to have its effect. Those companies would act as conduits for the government to buy all the worthless assets. The rest could avoid the strings by selling their assets to the government indirectly through the conduits.

This all may not matter if the market has bottomed out or will shortly. In that way the market will have in effect cleaned itself out and go into repair mode all without the government's help. If that is the case then little else really matters.

"Fears are mounting that many Wall Street banks and financial firms will refuse to participate in the US government's $700bn bail-out package, leaving global markets and world economies in a perilous state for months to come.

... Wall Street analysts, believe the addition of so many terms to the bill might deter potential participants.


Sources close to Goldman Sachs and Merrill Lynch indicated the banks might choose not to participate in the bail-out as there is a growing view on Wall Street that the market may be bottoming out.

Analysts also believe that the mere presence of the government as buyer of last resort will be enough to get credit markets moving again, and that a large number of banks would not need to take part for the legislation to succeed.

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