Goldman Sachs: Bank bailouts could total $4 trillion

Reuters reports that bean counters at Goldman Sachs–seconded by New York Senator Chuck Schumer–are now suggesting that it may take $4 trillion to restore the banking system to solvency. It seems like only last week that those estimates were running in the $1 to $2 trillion range–but then again, it was only last week.

You can be sure there’s a pigs-at-the-trough factor in that number as Wall Street and the banking system at large line up to unload their dicey debt. But here’s the kicker: “That money could buy bad assets, which would then be repackaged and sold to investors to raise more money which could then by recycled to buy more assets.”

So banks need to get these debts off their balance sheets because they terrify other banks, and investors, and cause them not to lend money to each other. So the solution is for the government to buy them up and sell them to investors? Who are these investors, and what will cause them to start buying up “assets” that, for some crazy reason, they deem worthless?

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Comments (5)

  1. Submitted by dan buechler on 01/30/2009 - 09:04 am.

    Steve, I had previously read reports of 3 trillion. Its the toxic assets and the inability or extreme reluctance to deal with them. Its almost as if we have to semi nationalize the banks in order to get it uprighted. According to the oxford history of the U.S. one of the problems of the twenties was that many banks were run almost like pawnshops (whatever that means i.e. with lax oversight and non professionally).
    Lets hope that our best and brightest can figure a way out. I mean that with all seriousness.

  2. Submitted by Annalise Cudahy on 01/30/2009 - 09:11 am.

    We have to start with what the latest buzz word, “toxic asst” means. These are all kinds of instruments, generally mortgage backed but not exclusively, that the value is not currently known. They are not “worthless”, necessarily, but no one wants to touch them until there is a functioning market which can determine their worth.

    This happens in a panic. People dump assets in favor of cash.

    Will we have to be on the hook for all of this in order to re-start the market? No, not at all. In fact, the real core of the market that is broken, in real estate, is what needs to be fixed first. The institutions that are holding these securities are insisting that they need to be off of their books, but that’s not necessarily true. But it will take time to re-start the real estate market and get this working again.

    The goal of the latest Obama “economic recovery” bill is to avoid a depression – no matter what anyone says. With some time it may indeed do that by getting the market for various securities and real estate moving again. My concern is that money is not being put where it needs to be, which is on the ground in the individuals and CDCs that will turn real estate around. That will likely have to come later.

    In the meantime, the call for $4T is accurate, but we should not expect that all of it will come from the Feds. If we can get to a place where these assets can be valued, even at a fraction of face value, there will be private money. That’s the working plan right now. The dice are in the air.

  3. Submitted by dan buechler on 01/30/2009 - 10:32 am.

    Erik, excellent but please define CDC. Even google didn’t define it.

  4. Submitted by John Hoffman on 01/30/2009 - 03:45 pm.

    What was done before bailouts? And why aren’t we going that historical path? Aren’t bad assets being written off all the time regardless of bailouts? Under the principle “one man’s trash is another man’s treasure” assets are repackaged all the time.

  5. Submitted by William Souder on 01/30/2009 - 08:42 pm.

    I think if there’s one group of financial sharpies we can put our faith in, it’s the “bean counters at Goldman Sachs.” I mean, when have they ever gotten it wrong?

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