Crisis Update: What We Are Waiting For

So the Treasury announced it's plan last week and Congress must approve it, so why are the markets so volatile?  Shouldn't we be celebrating that the crisis is over and stimulus is coming?  As I mentioned before, the Treasury's plan is amazingly devoid of details and since the announcement little additional detail has come out.  Markets don't like uncertainty and so are volatile while we wait.  But what exactly would be good for the market and the crisis?

The initial plan is intended to stop the crisis by buying mortgage assets and derivatives from banks and financial institutions.  Doing so will provide the banks with fresh cash and remove bad assets.  Ideally, this will free up lending capacity.  With extra reserves, banks will hopefully jump start lending and grease the wheels of the economy once again.  That is the broad idea anyway.

But what if the Treasury buys assets at a price lower than the banks have them recorded on their books?  Say a bank marked down some of it's iffy mortgage assets to $0.90 on the dollar, but the Treasury buys them at $0.80- the bank will have to record another $0.10 loss, something it isn't going to want to do.  On the other hand, what if a bank can sell assets to the Treasury at a price higher than they are worth?  How will the Treasury know?

Another problem is that the plan bails out the banks, but the root cause is consumers/homeowners who are defaulting.  Shouldn't the solution help prevent the default which will in turn save the banks?  This seems more logical at first, but who should be helped and to what degree? Hey, if the government is going to give out money to prevent defaults, maybe I should stop paying to get some free dough too?  Do subprime borrowers who had no business taking loans in the first place get help and if they do, won't they default again in a few months anyway?  How about flippers who took out loans to speculate?  Lower income borrowers only?  Should loans be renegotiated to a lower principal value and by how much?  Who will do the renegotiating?  By what mechanism will all this magically happen and how quickly?  Obvioulsy there are many problems with all these approaches and more questions than answers.

So we wait.  We wait for details to emerge so that investors and lenders can assess if the plan will work.  And we wait for the political process to make the plan even worse.  As of now, there seems to be little consensus on Wall St how it will turn out and even more importantly there is little consensus what the results of the mystery plan will be.