Hank Paulson, Buy-Sider

The details of RTC II are emerging, and it's pretty simple: give Hank Paulson $700 billion, let him buy up mortgage-related toxic waste, and thereby rescue the banks and save the global financial system.

Henry Blodget asks one key question: how on earth will these things be priced? All we know so far is that it's going to be set up as a reverse auction, but that raises more questions than it answers. Reverse auctions are easy if you're dealing with something fungible. But CDOs and MBSs and the like are all unique, and I have a feeling that Paulson will have to hire a large number of highly-qualified bond-market professionals to look very carefully at every instrument on a case-by-case basis. My guess is that there will be some kind of performance-related pay, which will be an interesting development as far as the civil service is concerned.

The good news is that there are probably a lot of those highly-qualified bond-market professionals looking for work right now. The bad news, of course, is that they are the people who created the problem in the first place: is there any particular reason to believe that they'll be a particularly effective solution?

One thing does need to be cleared up: this, from the NYT, is confusing, and pretty much false.

The ambitious effort to transfer the bad debts of Wall Street, at least temporarily, into the obligations of American taxpayers, was first put forward by the administration late last week.

I'm pretty certain that Paulson is not going to buy up the obligations of Wall Street banks, let alone guarantee them. If you hold bonds issued by Goldman Sachs or Wells Fargo, they're going to remain obligations of Goldman Sachs and Wells Fargo. Instead, the government is going to buy bonds owned by Goldman Sachs or Wells Fargo -- bonds which, at heart, pay through to bondholders the income from millions of Americans' mortgage payments.

American taxpayers will have new obligations: in order to buy those bonds, the government is going to have to borrow hundreds of billions of dollars. That's new debt, and government debt. But there's no government guarantee on anything. And if you own a CDO or some other mortgage obligation, the government is definitively not going to step in and make sure you get paid in full.

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