The risk is future volatility.
If future volatility declines or moderates it might be successful.
If future volatility increases your dead.

Being short future volatility has not worked for the banking industry, thus I am doubtful that it will work for the US Government.

Not many banks are positioned to recapitalize in a steep yield curve environment. I think this was a symptom of the inverted curve they had to deal with for the last 2 years.

A first mortgage is only a “dodgy asset” if the loan was extended without any common sense underwriting standards or a down payment requirement. If the government limits its subsidy of 4.5% mortgages to those made to borrowers with good credit, with 20% down payment requirements, and loan amounts limited to 3x the borrowers’ annual income, what would be dodgy about that?

Wasn’t this the original TARP plan? We were going to but the toxic assets, fund them, and then sell them later at a profit. That was the plan of William Gross, wasn’t it?

Of course, you ask the sensible question: If it’s such a good deal, why doesn’t the government do it as a matter of course? Unless, of course, the government only likes buying and investing in a crash. That’s not a terrible strategy, I suppose, but it would lead you to wonder if the government would use its power to unreasonably take over businesses. I think that’s John Hempton’s concern about the FDIC.

I am literally dumbfounded that this has not yet been recognized as a crisis of solvency and not liquidity. We’re going to have to see a Treasury auction fail before that hits home and that’s sickening to me.

Who are they going to lend long to?

Homeowners? [Ooops..no luck here.]

Export driven countries? [Why---they don't need the $$?]

Import Driven countries? [See Homeowners]

Other banks? [Good luck with that]

Businesses? [If all the above are tapped and therefore in a difficult position to drive your growth--- a la The Big 3 which needs it's customers to extract home equity in order to purchase that shiny new car--why would you want to borrow long, when your growth is screetching to a halt?]

Wait, I know….how about this:

They borrow short from the Discount window and then lend long by purchasing 10 and 30 yr Teasuries? Great Scott! I think I’ve just solved our problems!!!

[For a visual, picture a rat on a spin wheel]

Was the solution then:
1) Keep the loan on the books at face value (no writedown as it would have made the bank insolvent); and
2) Engineer an upward sloping yield curve and encourage the banks to borrow short and lend long, with a wink and a nod that they won’t get hurt doing this, so that banking balance sheets would get repaired.

What’s the difference between then and now?

I live in a house, which combined with my Wells Fargo Equity Line—also prints money.

I work for a Fortune 500 Company, run by wizards who have access to a giant corporate credit card—so we are able to take out Covenant Lite Loans. We borrow the money and use it to sell yen and borrow the Pound.

Admittedly we do sell a somewhat dodgy asset—but we spread our sales out all over the world—so nobody gets hurt. On the stuff we can’t sell, we stick in a place called Tier III. This allows us to back to the markets and borrow some more.

My employer prints money.

I live in a country that has gone from The Gold Standard to The Paper and Ink Standard. It too, prints money.

My minds-eye beholds in my minds-hand a virtual coin. “In God We Trust” has been replaced on the heads side with “We’re All Financial Alchemists Now” and on the tails side with “We’re All Gutenbergers Now”.