The House of Representatives approved the government’s $700 billion bailout plan today and the market hasn’t reacted much. The other day when the House didn’t pass the plan, the market plunged about 778 points. Right now though it’s sitting a little more than 100 points up for the day. We’ll to see how this all plays out, but at least the bailout was decided one way or the other.

As I wrote the other day, I got some great comments from readers regarding the bailout plan. Here’s another one for you to read. Tomorrow’s Cabot Wealth Advisory will contain many more insightful comments from our readers. Please leave yours here, as we love hearing from you!

“Whereas I absolutely abhor the idea of the government getting involved, I think the bailout has been misrepresented.

“The plan basically involves the U.S. Treasury using money to run a distressed debt fund. In other words, the U.S. Treasury will raise funds (by issuing bonds rather than by adding a surcharge to taxes) to buy (at knock-down prices) assets that are hard to value right now given the pervasive lack of confidence in the market, and that are therefore being written down more than could possibly be justified by any sane analysis of their true future potential. The RMBS and CMBS assets are valuable so long as people keep paying their mortgages/notes. They have inbuilt protections for loss–with someone having to bear that loss–but the valuations of the ABS bears no resemblance to real losses. For example, Merrill sold its portfolio for 22 cents on the dollar, which implies that 78% of debtors would default 100%.

“That is just not going to happen. There might be a 10% or 15% default rate on mortgages–everyone can see that the highest hit states only get just above 20% in specific areas/cities/sub-divisions of cities–and the default is not 100%. There is some recovery value in the house/land on which the house is built.

“Consequently:

(1) The U.S. Treasury would stump up loads of cash now–and this cash would come from whoever usually buys U.S. Treasury bills, which means many, many non-U.S. entities–to buy assets dirt cheap.

(2) The U.S. treasury would hold and manage those assets for a period of time.

(3) The U.S. treasury or its managers would sell those assets in a process that does not resemble a fire sale over time. The U.S. Treasury is as likely to realize a profit on its investments as any distressed debt investor … or indeed as any investor in the stock of a fallen angel. Warren Buffett bought Salomon Brothers the last time things went pear-shaped, held the asset for a period of years, and then sold at a profit. Warren Buffett is doing exactly the same thing this time with Goldman.

“What is the downside for the taxpayer? It’s first that the government is getting involved in the markets, and second that the issuance of additional debt may well have a negative effect upon exchange rates so that going on holiday abroad or buying foreign made products may be more expensive.

“What is the upside for the taxpayer? The ABS–many of which are still performing entirely as anticipated–will continue to generate revenue with which the U.S. Treasury can amortize the US treasury bonds and interest on them. Once sanity returns to the markets, including to the real estate market, the U.S. Treasury will likely be able to sell the ABS at a profit.”

M.M.