A friend has this in a berkeley chat room, so i thought i share with folks, for what it’s worth…

“First I do not claim to be an “economist” but just sharing my opinions for open discussion. I think this is a very important issue, a once-in-a-lifetime event that will affect no less than our financial future and our life saving. As the experts are saying, this is the rare period when fortunes are made, or lost; therefore, I will continue to post on this subject as long as there are positive responses, regardless of any sarcasms that may result.

That’s said, from my research on this subject, I’d like to point out some common misunderstandings on this bail out plan :

1- For the latest bail out plan, the loss, if any, for the tax payers is just a fraction of the $700 Billlions since the mortgages most likely would go down just a fraction:

$700 Billions is the cap at any one time, but there is no limit to the number of times the government may buy and sell. If you have $100K in your account to buy and sell Cisco stock 3 times, and lose 30% each time, you would lose 2/3 of your account.

2- The government could make “substantial profit” in the $700 Billions mortgage buy out because they would buy the distressed mortgage assets at a discount:

If the deals are so good, then why do the financial institutions are begging for them to be taken of their hands ? According to experts, what most likely to happen is the government would buy at above market prices, hold them for 5-10 years, then sell back to the financial companies at even lower prices, and that the net cost to taxpayers is likely to be at least half of the $700 Billions. Of course, the administration has a history of grossly understate the cost – remember President Bush’s initial estimate that the Iraq War would cost only 50-60 Billions when he asked Congress for war authorization ? They most likely will come back and ask for more money later.

3. We will not bail out foreign investors :

The bail out will apply to all assets in the U.S., whether held by U.S. or foreign entities.

4. In earlier bail out, i.e Fannie/Freddy, AIG, money market,... the government only took over the mortgages or provided guaranty; therefore, we did not and will not lose anything :

These assets most likely will lose 3-10% of their values, or even more in worst cases. We are talking about losing 3-10% of about $10 Trillions of assets.

Therefore, I think we need to put this bail out in proper perspective, and invest accordingly. One thing is certain : issuing $700 Billions of new bonds all at once will definitely put pressure on the dollar and bond funds.

Of course, there will be longer term effects, which I think are beyond the scope of this discussion.”