Eric's excellent post illustrates a key point--it looks like Paulson has already given away the store before he even sits down to negotiate. He has already implied that the public interest requires buying up these mortgages for the good of the country, so (oversimplified) the sellers already know that Paulson is more desperate to buy the mortgages than they are to sell. So, ironically, it is now the sellers who have the upper-hand in fighting over the valuation of the paper they hold.
Not to mention the apparent "lemons" problem--presumably there is an information asymmetry here such that current holders have more information about the value of these securities than the Treasury. Which means that with respect to paper that is overvalued, the banks will sell. With respect to paper that is undervalued, the banks can keep it and resell it to someone else.
This all reminds me of the old banking adage: "When you owe $100,000 the bank owns you. When you owe $100 million, you own the bank."
But what if you owe the bank $100 billion? And the bank is the Federal Reserve?
While this is being sold as solving the liquidity gridlock, the Fed will take them off the banks books and any losses will not be charged against the bank's capital. The banks capital is shareholder equity, and hence this is a bailout of shareholders.
By linch on Monday, the "good" bad assets will probably all have been transfered/sold to shelf corporations that will begin trying to issue new stock by Friday. Why not? If the new company fails, there is always the bailout.
Imagine what a clever crook with some cash and a lot of brass could do with available Soutern California property?
IMHO they should ignore the mortgage market, and spin off all of Fannie/Freddie for the purpose of permanently closing the government's interest in home mortgages at all. It's one thing to grease the banking wheels, it's a completely different one to be in the home mortgage market.
Then you're both owned by the Chinese
It goes something like "what you never want to hear from your banker is that he had an exciting day."
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