Sunday, November 30, 2008

Pictures of Government Interference

Did the bailout prevent the market from finding a clearing price for mortgage backed securities?

A while back I introduced a market index for market backed securities, located here. I also used this augmented graphic below.

In the above graphic, I showed how the value of mortgage backed securities tanked when Henry Paulson finally announced that none of the bailout money was going to buy these assets. Interestingly, the value of these assets finally hit a bottom, and bounced back in value.

A coworker and I have been confused as to why no one wanted these assets because the implied rate of return was getting pretty huge. The Wall Street panic should end when no one has to write down any more assets.

If a bottom for this market could have been achieved back in August, panic would have subsided and many clear-headed investors would pour money back into these assets. Instead, the bailout increased uncertainty and delayed the ability of companies and investors from knowing where the bottom was going to be. Should they sell now or should they wait for the Treasury to buy them at a higher price? Should they buy or will prices fall further? The bailout prevented these questions to find answers, because the market was kept from performing its normal information gathering tasks.

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