Bryan Caplan  

Nailing Down a Kessler Bet

Ben and Me... Why Did Financial Markets Like...

Several readers suggest that I bet Andy Kessler about the U.S. government turning a profit on its bail-out. Here's Kessler's claim:

My calculations, which assume 50% impairment on subprime loans, suggest it is possible, all in, for this portfolio to generate between $1 trillion and $2.2 trillion -- the greatest trade ever.
I'm happy to bet at even odds that taxpayers will lose money, not earn trillions. The only problem is nailing down the specifics. What is the cleanest way to measure the bail-out portfolio's return ex post?

P.S. I've previously suggested a 10-year window - try to work with that. :-)

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COMMENTS (4 to date)
Patri Friedman writes:

Barry Ritholtz has offered a million dollar bet that the bailout will lose money, so bigger guns than you are lined up on your side.

The Snob writes:

Betting on a deal like this to make money seems an awful lot like betting on Wile E. Coyote to get the Road Runner.

First, we need to factor in what the $700bn costs, as that isn't free money. Even if the appetite for USG debt is bottomless right now, isn't there a crowding-out issue there?

Second, 50% impairment means how many million foreclosures that will eventually need to happen? I have to wonder what the politics will look like when every single mother with a disabled child and old retired couple are getting foreclosed on not just by a top-hatted banker, but their own government. Could we actually be better off in this case with an Obama administration that might be inoculated against the first 6 months of bad press that this would bring?

The only good scenario I see for this is that the market is just in a total, dress-over-head panic right now, and the gov't will be able to dump these back into private hands within a couple years, which won't be enough time for the really weird problems to get started in earnest.

Are PE firms or any of the other institutional players anywhere to be seen in this? There are a lot of recent-vintage VC funds out there in the billion-plus range that have a 4-7 year timeframe, and I'd imagine they'd start jumping in if the opportunity to double, triple, or more in that timeframe was becoming clear-cut. My cynical take is that the holders of all this debt are expecting the government to clear them out long before they get to the fair market value that would bring in the private institutional money en masse.

Dan writes:

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John Fast writes:

I'm no Barry Ritholtz and I'm still happy to put up six figures -- the equity in my home, which had a 25% down payment -- against Andy Kessler...or, rather, against the bailout...or, rather, against the competence of the State.

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