I was reading up on the new law over at cnn.com and one of my fave analysts, Meredith Whitney, was interviewed.  In the video she was explaining that she didn’t think the bail out made any sense and that it did nothing to restore confidence which, in her opinion, is the real issue.

Meredith is pretty cool and I’ve followed her for quite a while as she always seems to be right. And I really like that in an analyst.

She’s also married to a professional wrestler and you just don’t find many Brown educated Wall Street analysts married to professional wrestlers so it’s interesting in a National Enquirer sort of way.

In addition to Meredith’s interview, there’s a new article up at cnn.com reporting some comments by Warren Buffett that outlines HIS bailout plan.

One of the biggest issues that I’ve been railing against over the last couple of months is that the Feds seem to be doing everything they can to shut investors out of this recovery when in my opinion (and now in Warren’s too) they should be inviting us to participate. AND giving us incentives to participate.

Here’s an excerpt:

He described a plan he thought of Thursday morning on the way to the Summit that would allow Treasury and private investors to buy assets together. He said his proposal would kickstart demand for mortgage-backed securities, help find a market price for these troubled assets and make it more likely that taxpayers would be made whole or even come out ahead in the bailout.

Under Buffett’s plan, Treasury would lend hedge funds, Wall Street firms or any other investors 80% of the price for distressed assets. Investors would benefit from borrowing at lower rates available to the Treasury. But the government would get first claim on the sale of those assets, which means it would get its loan back plus interest and possibly turn a profit. Only then would investors see a penny.

“Now you have someone with 20% skin in the game,” explained Buffett. “Believe me, I won’t be overpaying if I’m buying with that kind of leverage. And you have someone [the investors] to manage the assets to the extent they need to be managed.”

There you go!

Imagine if we could all get 80% money on the cheap from the Feds to buy up real estate at deep discounts without having all these ridiculous rules such as “no more than 4 financed properties” and “no refinancing out of an LLC.”  We might actually get some economic recovery.

And if I could get my money that cheap, I wouldn’t even mind splitting some of my profits with the government.

There is a lot of buzz about this bailout proposed by the Bush administration.  A few nights ago the president addressed the nation in what sounded like a plea to Congress. He and his advisers are absolutely convinced this nation needs a bailout… and I agree.

From what I have seen, some of the important details are:

• $700 billion in tax payer money to buy bad mortgage backed securities (MBS)
• Limits on the amount of CEO income from the banks bailed out
• “Cramdowns” – this is would allow bankruptcy judges to reduce the amount of debt a borrower owes to a lender.

Let’s break this down.

$700 billion is a lot and it sounds VERY scary to hear the President say this will be tax payer money “at risk”.  I, however, look at this as a very smart investment by the government. MBS are under valued right now because of consumer confidence. Past investors of MBS are putting their money in other areas because of the doom and gloom spreading across the world. This is causing the values to plummet. Once confidence in our market is restored the values of these securities will increase.

The fact is, most loans are still good loans. About 1% of loans purchased by Fannie Mae or Freddie Mac (the two largest purchasers of mortgages) are consider seriously delinquent. A serious delinquent loan is 90 days or more past due.  Keep in mind that Fannie Mae and Freddie Mac did not buy subprime loans so their defaults are expected to be lower than what some of the big Wall Street banks have, but they are still a good overall indication of what is out there.

Warren Buffet said yesterday that the US Government is the only one that is patient enough and strong enough to buy these securities and he believes the government stands to actually make money from this bailout. In fact he is so confident in this bailout that he invested $5 billion into a financial company. I don’t know about you but I listen when Mr. Buffet talks so I am really not concerned about our tax payer dollars.

I hear the argument that it is not fair to bailout banks that made bad decisions. Its not fair that the CEO’s stand to make millions while stock holders lose their shirts. Not knowing the details of the plan I can tell you that every attempt to limit CEO income will take place for any bank participating in the bailout. I also wonder why people think these banks are getting off scot-free.

Part of the bailout plan is to reduce loan amounts for troubled homeowners with the “cramdowns”. We might not think it is fair for the government to buy bad debt from some of these lenders but those same lenders will say it is not fair for a judge to say the borrower does not need to pay back the money they borrowed.

I really like the idea of a bailout. Lack of liquidity is damaging our economy to the extent that we will go into a long and painful recession. I was not alive but I get the impression that this has or soon will have the same feel as the Great Depression. Rates on Treasuries (the safest investment you can get) are near all time lows. It almost does not make sense to even invest in them. Many people considering the ultra safe investment might as well stick cash under their mattress.

The bottom line is by the government buying this debt we should see some more liquidity in the mortgage markets. The idea is more liquidity will loosen guidelines creating more buyers for property (and making it easier for us investors) so values will increases and the entire economy can head for a recovery.

Please post your comments – “What do you think about the bailout plan?”