Here's the fundamental reason that I believe this bank bailout will fail:

[girl gone mad]

Most experts believe that the underlying cause of recent disruptions in the financial markets is a liquidity crisis. Banks are refusing to lend money to each other because there is too much bad debt floating around, and there is a basic lack of faith in the banks ability to make good on the overnight loans.

I was re-reading Margin of Safety, by Seth Klarman, this morning. Klarman is considered by many to be the next Warren Buffet. He manages a private fund that has earned 20% annual returns for the past 25 years, and he's an expert in buying up assets of distressed businesses.

http://en.wikipedia.org/wiki/Seth_Klarman

Here's what Klarman writes about investing in financially distressed securities:

"Since the effect of financial results on business results can vary from company to company, investors must exercise considerable caution in analyzing distressed securities. The operations of capital-intensive businesses are, over the long run, relatively immune from long term distress, while those that depend on the public trust, like financial institutions... may be damaged irreversibly. After a successful exchange offer, an injection of fresh capital, or a bankruptcy reorganization, these businesses recover to their historic level of profitability. Others, however, remain shadows of their former selves.

And there lies the rub. The banks we are bailing out have tarnished their own reputations by pushing subprime loans onto the unsuspecting masses, then turning around and selling off these risky mortgages as AAA rated debt. They engaged in a pattern of bad behavior in search of short-term profits. As a result, they have lost trust.

As Klarman writes, once the public trust is gone, the damage may be irreversible. A bank's biggest single asset is usually its reputation, and these banks abused their reputations, some of which had taken over a century to build. No government bailout can restore investor confidence in a system that is so deeply flawed. I believe that regardless of any action on the part of the government, these banks will remain shadows of their former selves.

[Uben]

1. Not to pee in your Wheaties, but.....

......the real Warren Buffet has just invested $5 billion in Goldman Sachs!

[ShortnFiery]

2. WTF? Warren Buffet is not God Almighty. We will throwing our tax dollars in an overseas money pit.

:grr:

[girl gone mad]

3. Did you read the details of the deal?

It bordered on extortion. Few investors would be able to get such terms.

[Uben]

4. I rest my case! nt

nt

[girl gone mad]

5. What case?

Buffett will earn a hefty 10% dividend yield on his preferred shares. The warrants, which are immediately exercisable, have a strike price of $115 a share.

GS was desperate. Buffett was willing.

I'd still bet against the long term success of GS.

[girl gone mad]

6. Here's the other thing about that deal..

GS was willing to give Buffett such an incredible deal because they are hoping to trade on his reputation now.

That might work.

A government bailout won't. We don't exactly have Buffett's reputation for making sage financial decisions.

[girl gone mad]

15. Looking at GS today..

Buffet might already be looking for a way out of this deal.

I do think he made a mistake, because I believe Klarman's statement is dead right.

[Smart Guy 4 Freedom]

18. Bailout:

Yes he did and do you think he did this because he is an idiot? NO he did it because he knows a good deal when he sees it. He bought out American Express for the same reason it was a good deal. Buffet is no fool.

[madrchsod]

7. bad behavior?

it`s criminal behavior. it was fraudulent business practices that destroyed the credibility of these institutions. the people responsible should be legally held responsible for what they did but we know they will not.

[girl gone mad]

10. Yes, you're correct.

I'm prone to alliteration, but it was criminal behavior and there should be criminal charges brought. Prosecutions would go at least some way toward restoring the reputation of our markets.

[Kip Humphrey]

8. Reason bailout won't work: 31-DEC-08

[dixiegrrrrl]

13. 'splain that to me like I am a 5 year old....

the 31-DEC-08 thingy...

[Kip Humphrey]

16. Ok...the numbers are necessarily fuzzy because the derivitive market is unregulated but

At the end of this quarter (Sept 30th) - what made this bailout soooo urgent - about $11 trillion derivitives reset their margins to market value. US banks equity loss exposure is $1-1/2 to $2 trillion. Now, at the end of the year, the same thing occurs again except multiply the numbers by somewhere between 6 and 10 times.

This bailout was doomed before it started. There is no way one could hope to prop up a $500+ trillion market with $700B.

The solution is to cap the derivatives and hedge funds markets, preventing new equitized debt being created and re-regulating the industry to prevent future equitized debt; cancel mark-to-market for 6 months; require intra-bank short-term lending; convert primary residence foreclosures to 7% 30-year fixed-rate Fannie Mae mortgages with required 6-month payment insurance during any 12 month period; bring the overnight fed funds rate to 0% by year-end; add a $250 billion 30-day payroll loan fund available to US business solely to meet payrolls. Over the next 5 years, slowly increase all margin requirements to 25%. Provide a $2,500 business tax credit for each and every new US job created in 2009 (with US citizenship verification). Total government infusion ~ $350B.

[Land Shark]

9. connect dots: if bill passes, affected banks need have capital reserves to cover deposits of ZERO%

That's like a guarantee that trust never returns, as unlikely as it is to return in a business based on trust, as the OP points out. There's a DU thread analyzing this point, that has "holy cow" as part of its title, the whole idea that banks would not have to be able to cover deposits to stay afloat is extraordinary.

[Smart Guy 4 Freedom]

11. Bailout?????

Has anyone done the math on this thing?

If the government is going to spend 700 Billion on failed mortgages, then just have them go back 18 months and buy every mortgage that has defaulted, along with the estimated 1 million foreclosures coming within the next year and pay the banks off. That equals an average of each mortgage costing $100,000. The banks have been paid off, the homeowners have no more mortgage, and this frees up the entire amount of money going to the banks to be reinvested into the economy by the homeowners. New cars will be bought, new washers, dryers, and a million other things as well. This results in a boom to the economy, growth means jobs etc.... don't you guys get it,it is just another way to completely rob the treasury so that the next President will have NOTHING to work with to help the little guys, but the millionaires will get even richer and we the little guy will get even poorer.
How many of you would like to NOT have a mortgage to pay any more?????
It's bottom up,not top down economics people.

[Uben]

12. I own my home

What would I get out of it? Nothing. Only those who have recently bought houses would benefit. Bad deal!

Any monies spent have to benefit taxpayers as a whole. Most people did not buy a house recently, so your "bottom-up" theory does not hold water.

[Smart Guy 4 Freedom]

17. Bailout:

True if you own your home you would get nothing out of it! That can not be argued but most likely you bought your house at least 15 years ago and this THIEF we have for a President has only been in office for 8 years, so your mortgage was most likely made when the system was working properly. The problem is that it was Mr. Bush (I use the term Mr. out of respect for the Office not the man) was the one that called on Freddie and Fannie to make these loans for homes to people that were bad credit risks to start with. So it has only been the last 8 years that have caused the problem.

[alfredo]

14. It's failing in the house right now!!!