$700 Billion Equals 1,400,000,000 Bicycles @ $500 Each

That's one billion four hundred million bicycles at a cost of $500 each - that's a lot of bicycles, almost five for every person in the USA.

I've been able to learn a bit more about what's in the works as it relates to the rescue plan. Rather than re-hash that, here's my two cents relating to a description of the securities and what it will take to price them.

Most importantly, there is no market for this stuff, so any value is completely arbitrary. If the purchase price of any of this stuff is equal to its book value, its current holders are getting the deal of the century. Further, under that scenario, there is a pretty good probability that this $700 billion will never be repaid on accounta the underlying property will never have enough value to generate the kind of cash flow to reach as far down the priority chain as to get to the bottom most tranches of the deals. (see below for a discussion of cash flow in CDO's - in a nutshell though, a pool of mortgages, say 5,000 with an average balance of $250,000 or $1,250,000,000 total, is pledged to the repayment of a series of notes. The notes get divided up and their cash flow gets prioritized with the highest rated classes [tranches] getting first dibs on principal and interest payments from the collateral pool. The last tranches in line are the equity portions of the deals. If there is not enough cash flow generated by the collateral pool, the equity gets nothing or, at best, less than what was originally projected.) It is the equity in the deals that the Street has for sale.

By the way, when the Street began to understand that the sub-prime market was a bit outside the range of their ability to comprehend, they "re-securitized" the equity that they were holding, making it into Collateralized Debt Obligations or CDO's. The Street held on to the equity of the new securities and sold what they could. Modeling junk like this is next to impossible. Not only that, but one needs to get ones hands on the indentures for each deal. I assume that they were all private placements, so there is a lower requirement for disclosure. In other words, there is a low probability that anyone other than the dealer that did the deal actually has the cash flow modeled.

Remember, the mortgages underlying this junk have defaulted. In addition, the property is worth much less than the mortgages. So, we have mortgages with no cash flow secured by property that has depreciated by about 50%. Do you think that the treasury is going to get its (our) money back?

Now, here is what I don't understand. 1. Who is responsible for pricing? 2. What is the treasury buying? Are the sellers taking any portion of the loss? Bigger picture question, is there a liquidity crisis? If there is, how come nobody is talking about it. It seems to me as though, that markets are functioning - but I'm pretty far away
and I haven't had time to speak to anyone who knows.

So, why not set up a program that is like what the Street was using before the meltdown. They were financing these positions until they ran out of cash flow and then capital. The firms that are left have capital but they need cash flow. If the treasury does a massive REPO secured by this junk, the Street will still be on the hook and there will be some accountability as it relates what happens down the road.

I don't know ... but I wish I did. I'll bet that someone makes a ton of money on this junk at some point in the future though.

Hey, why not do a MASSIVE REIT? Have the treasury buy it and the tax payers own it. As property is sold, dividends flow out to the tax payers as repayment of tax that we never should have had to pay.