I love this blog. CR, nice analysis again. Is there a way we can cut and paste these questions you posed to send directly to the representatives who will be hearing from Fiddlee-dee and Fiddlee-dum tomorrow?
I still think 75% is pretty generous. Considering that
A) The government will only get the most "at risk" mortgages, thus increasing the risk of default
B) California is looking at up to a 50% decline before hitting the rent vs. buy parity
C) Many houses defaulted on seem to be suffering a great deal of damage (everything from simple neglect to theft of appliances, even cabinets and plumbing)
In the 1990s, a Japanese government effort to buy troubled assets from banks to free up lending failed because sellers weren't willing to accept the prices offered, said L. William Seidman, a former chairman of the Federal Deposit Insurance Corp. He said that wasn't a problem he had as chairman of the Resolution Trust Corp. in the U.S., which sold off failed lenders' assets after the savings-and-loan crisis of the 1980s.
``If you're talking about institutions that haven't failed, then you have the question of whether they want to sell at a low price, particularly if that price depletes their capital,'' Seidman said in a telephone interview today.
In Japan, we did all kinds of things, trying to have a mediator who would set a price and other kinds of methods to get around that,'' he added.It never really got done, so it was not successful, but here we probably have a more urgent need for more institutions to do something.'
If you think that imprudent loans are no longer being made, you should look at the auto market. The out-come will be no better there. Credit cards, durable goods (as in Best Buy) will all fall, each in it's own turn.
Every day on my way down to Wall Street I pass a homeless encampment. It's usually about 4 or 5 guys that spend their nights sleeping at a construction site. I live on the Westside of Manhattan. I usually hand them any change I have in my pockets, kind of a karma thing. I decided to have a chat with them this morning.
Turns out 2 of them are construction workers that sleep near/at the construction sites with the hope of finding some work the next day. The other two were doing random small jobs around the city (construction related) when times were good. They were recently homeless, about 2 months.
Things are getting bad, as these were not your "average" nyc homeless people (I'm a lifetime New Yorker). I've read in the papers that tent cities are popping up, but it's not until you see it with your own two eyes that you start to believe it.
Needless to say I've called both my Senators today to express my opposition for the Wall Street bailout (as proposed) and stressed that something must be done... Unfortunately, I don't know what a good solution would look like.
"One possible explanation is market failure based on information asymmetry."
Anther possibility is the stealth wealth transfer program (SWTP). GS or some other player buys podunk bank for pennies on the dollar and sells podunk's toxic assets to taxpayer at full price. Then some other player buys toxic asset back from taxpayer at pennies on the dollar. Wash. Rinse. Repeat.
This sure seems to sum up the achilles heel of MBS one fell swoop:
But if the assets are all impacted by one parameter - in this case future house prices - aggregating assets does not lower the risk.
I mean, could some of those Wall St. geniuses have dwelled for a moment on the fact that aggregation only reduces risk for uncorrelated events? Can we hire CR to singlehandedly replace Moody's?
I wish I could say that your analysis is complete but it is not. You have forgotten why this mess continued for so long. The re-bundling and sale of the same asset over and over again. The originating mortgage asset is now just a percentage of the cost that someone paid for an MBS.
This is why its a ponzi scheme. The original asset may never be underwater but the price that it would take to make the owner whole is greater than the original asset value.
It was like trading in a car you are underwater on. All is fine ass long as you keep doing it but at some point you end up wing 100,000 on an asset that is worth 6,000.
Long time lurker, first time poster. I think this analysis oversimplifies these assets, as many MBS are held in tranches of varying seniority. So for the less senior securities, if there's a 20% loss severity (for example) in the overall pool, that tranche can be entirely worthless while a higher one up the chain could be valued more along the lines of Kling's hypothetical. So while the more senior ones could theoretically be held to maturity, the junior tranches are entirely worthless regardless of future housing price moves.
I assume the banks would be looking to get the worst of the worst off their books and onto the taxpayer's, so they'd likely dump these very assets and not the "super senior" ones which might actually have some value.
--
An interesting question is why do Bernanke and Paulson believe the Hold-to-Maturity price is higher than the current market price for MBS?
Because they are in the propaganda business AND they happen to be the agents of BFNYC.
They want BFNYC to get as high a price for their toxic waste as they can! They are just doing their job. They know that the American People are chumps.
There is a simple and cogent explanation to most of Americas problems.
Whether yes or whether no, whether reasoned or unreasoned, whether statisticaly correct or incorrect, NOTHING jsutifies giving the former head of a major broker-dealer a personal, unaccountable budget larger than that of the Pentagon.
Think about that. NOTHING justifies it. Not a recession, not a depression, not a meltdown. NOTHING.
Many banks are now finding out that a trashed home can have a value of less than zero. The cost of clean-up, taxes and fees can exceed any residule value
The risk premium curve on MBS is practically vertical, because of default uncertainty.
If Treasury can buy a majority position in a given issue, they can force modification of terms, which would let them reduce principal to the point where even the most timid investor would consider it investment grade.
The modified security could then be resold into a much more liquid market, which might well price it higher than today.
I'm not saying I love the plan. Only that it could conceivably work if done in this way. In short, CR is right about cramdowns.
Paulsen's and Bernanke's reason for needing this legislation kinda feels like my kid's reason for needing something. It always has an explanation of emergency and there is always some key piece of information lacking.
If all their real concern is liquidity in the credit markets, didn't they already take care of that when they created the auction facilities and opened up the discount window to just about everybody?
Instead of creating new legislation and a new taxpayer owned super SIV, all they have to do is get approval to increase the national debt, which they already do?
Ackerlof must be highly annoyed to know his lemons analogy was being used as a justification for paying above market prices for crap to bail out favoured parties. I think he was inspired to become an economist after his dad became unemployed in the Depression.
They don't really believe mark-to-maturity prices will be higher, but their plan is to MAKE them higher. Come on guys the plan here is for them to pay to much for the paper.
These assets have already been aggregated - that was the entire idea behind CDO/CMO - they put a bunch of different bonds together with different risks and poof the total was supposed to be less risky. Didn't work and won't work now.
The interesting thing the Main Post raises is not as the concluding paragraph suggests, "How finely can we split this hair "
To me, the more interesting question is - "Ben, do have enough time to secure the answer - given the 11 Trillion dollar problem you are trying to solve ?
How can any reasonable person thinks that house price declines can be stopped inspite of ongoing job losses, stagnant wages, HELOC issues, assesment frauds, mortgage frauds etc.
The truly troubled securities that will be bought are probably not the original mortgages, right? They're probably the tranched-and-securitized ones. And probably there, even the worst of the worst (lowest in the payment food chain.) 75% or 100% doesn't seem terribly unlikely for whatever it is Treasury ends up with, conditional on the fact that the investor chose to sell it to Treasury.
exactly drew....which means you can guarantee overpaying as soon as this snowball from hell starts, as the first assets to go will be of zero value. Whether we ever get into it far enough to ever recovery those losses is a complete unknown, but I doubt they'll be a penny left over for the taxpayers to feel good about.
Ya Andrew, so you move up the food chain from there, and once you get to a point where the prices might start to approach something that would be a mark to market, ya know, something that isnt zero, the market may take over, and then the taxpayer will be loaded fully with toxins and nothing else.
The FBI is investigating four major U.S. financial institutions whose collapse helped trigger a $700 billion bailout plan by the Bush administration.
Two law enforcement officials said the FBI is looking at potential fraud by mortgage finance giants Fannie Mae and Freddie Mac, Lehman Brothers Holdings Inc., and insurer American International Group Inc.
Goldman owns all these now, so why is FBI wasting cash???
I think CR has posted more than a few other analyses that explain why the MBS are far more complicated to price than his analysis here - default rate unpredictable, more than 36 different flavors in every MBS making each one as different as a snowflake, etc.
The point, I gather, was to use a very simplified analysis to get to the general question about why bernake things mark to maturity is higher than today's panic/fire/flood/hurrican/god-dammit-why-did-we-relect-Bush price.
And the point of that question, I think, is just to show what Bernake and Paulson admitted today: they don't have jack-all idea about how or why what they propose might work, yet they think no safeguard for the public (like an equity stake) needs to be considered.
And also to show what Krugman deduced: the paulson plan is to pay too much for the securities to recapitalize firms (or just to pay off cronies).
Or maybe we just got our bullish spring (light volume decline since Monday)... hopefully this will bring volume back and we can start pushing into Thursday's bar with quality of volume.
"But if the assets are all impacted by one parameter - in this case future house prices - aggregating assets does not lower the risk."
This is why CDOs (and especially cdo^2 and 3) were so comical. Having your residual error terms multiply along with your leverage is a bad business model.
Look how steeped the culture is in the concept of interest rates that fall forever. Even on this board, few can conceive of a twenty-year period of rising interest rates.
Come on.
How much value do those mortgages have in an era of 15% mortgage rates?
Only recently did that correlation approach one (all house prices in all markets falling.) Previously (on ER) there were quite a few markets where prices were on the rise. That said, the bulk of the original mortgage $s securitized are localized (S Cal) for example, in markets that are under severe stress. So I dont think the other semi decent stuff can have a snowballs change in hell of balancing that out. And now, with credit markets tighter than a mule's sphinchter, no chance.
The argument I saw that the pricing can be different due to different demanded returns, and different funding costs.
The Treasury can fund assets at a lot lower rate than the private sector. That means that they can pay more for the same cash flows, and still break even.
Also, they have a lower return target. The Treasury would be happy with a 0% return on equity (breakeven); private equity/distressed debt buyers want 20+%.
If the assets have a long life span, the different discount rates makes a big difference in pricing.
Paulson says:I fear
Like hell.
Give a critic an AK-47 and he couldnt get close to Paulson.
They do not do a Kennedy in Dallas anymore.
They fly in and out of global hotspots, like Baghdad, with impunity.
They do not fear JoeSixpack.
Joe fears a letter from the IRS.
This is funny.
Nemo and Nades, The point is you can usually grab a group of stocks - randomly pick 20 - and the beta of the group will almost always be lower than the beta of most of the individual stocks.
This is because the stocks aren't correlated. But in this case, if you aggregate MBS, this doesn't work - because they are correlated to one parameter - house prices.
"Whether yes or whether no, whether reasoned or unreasoned, whether statisticaly correct or incorrect, NOTHING jsutifies giving the former head of a major broker-dealer a personal, unaccountable budget larger than that of the Pentagon."
That's what struck me forcibly about this deal. It's a much larger figure than the DoD budget. As serious as it is, it's some kind of a monstrous joke.
--
Bernanke during Q&A in March 2007 on possible fall in home prices, The home prices for the US as a whole would not fall. The growth in prices will fall to 3-5%.
He knew what falling home prices would mean to the US economy and the markets and he was afraid to even take that probability into consideration.
Even after falling for 13 months in a row, the Case-Shiller Composite-10 is up 65% from 1995 after adjusting for inflation. Where would the MBS prices would be if the prices declined to 1995 inflation-adjusted levels?
He is lying about the prices for MBS because he wouldnt know what to do if the prices did fall to levels suggested by the markets.
In Bernanke and Paulson we are dealing with lairs who arr looking after the interests of BFNYC and not the American People.
The question is: What can the American People do about it?
A: Absolutely nothing. Nada. Null.
Political impotence of the American People is a well-kept secret.
Forgot to mention the convexity of mortgage securities.
Mortgages are a heads I win, tails you lose investment. If long term interest rates go up I'll stay in my house and increase the duration of the mortgage. If they go down, I'll refinance into the lower rate.
Now with Wells Fargo Jumbo's going for 9% who's going to want to buy an existing mortgage with a 5.5% yield?
There are plenty of investors with long valuation horizons, such as private equity. If they are not buying these assets, that means they do not believe the price is fair.
Why would these assets be more valuable to the government than to private equity???
Similarly, would the government allow pension funds and insurance companies buy these assets for their portfolios?? They also have long term investment horizons.
Paying above mark-to-market still does not make sense.
Paulson doesn't actually have to believe that hold-till-maturity will yield more, he just needs to have something to say to explain why the US taxpayers should pay more than fire-sale prices. He has to have some reason for rejecting purchases of shit assets above current value.
Remember, HP is a 'no-calculator' guy. They haven't (presumably) seen the assets so how could they possibly analyze them enough to develop a model?
If Bush/Cheney told you to buy above current market to prevent loses by the banks, wouldn't you invent some reason to 'believe' all will be well, some day? He believed the problem was contained. He believed that his bazooka could stay in his pocket. He can believe in dinosaurs 6000 years ago. Belief is not analysis and it doesn't have to depend on those nasty things called facts.
I suggest we concentrate more on the question of "what would really happen if there were no bailout".
Everyone around the country has to make the decision of whether to call Wall Street's bluff or not. It's time everyone put down, in the shortest form consistent with thoroughness, what your expectation of the impact of NO bailout would be. Let's express the impact in terms of economic sector, impact/severity, and duration.
Financial sector. No bailout means the holders of bad assets will have to bear most of the losses instead of spreading them across the other sectors. This means the existing players in the finance business are going to get wiped out, and will not be able to re-start quickly. This may be a good thing.
Transportation. Little impact. Financial products do not require much physical transport. Derivatives unwinding will cause some unexpected fluctuation in fuel costs. Transportation is a mature, consolidating industry; not much capital investment required.
Manufacturing. Some impact. Capital for new equipment will be harder to find, because the financial intermediaries that raise capital or lend it will be fewer, and they'll be much more cautious. This is an area that needs significant investment. $700B would make a good start if it were to be allocated to the manufacturing sector.
Agriculture. Moderate impact. Ag isn't investing that much capital right now - it's a mature industry.
Housing. Low impact. Correct: LOW. The housing industry isn't coming back until the middle class comes back. Bailout or no, the middle class isn't earning enough to re-start housing, and our fire-hose of debt from abroad is now shut down. That game is over.
Entertainment. Low impact. Movies are funded by rich people - Wall Street is not involved as an intermediary. Same for TV shows. New amusement parks are tied to middle-class income. Bailout not going to change that.
Professional services (non-financial). Little impact. U.S.' future economy depends to some degree on further specialization and development of this sector. Fin Service people can be re-directed here to good result. Capital requirements are not that great (offices and computers), but re-training costs are significant. Bailout has no effect on retraining, but saving the $700B and redirecting it here would be beneficial. Fin Services buildings and computer plant could be re-purposed.
So, my conclusion seems to be that Wall Street has not done much for the real economy over this past seven years, so it won't be missed much. The housing industry is flat on its back because middle-class people can't afford to buy a house, and debt is not longer provided by Asia and Europe (since the Ratings Fiasco, you see).
Therefore, I conclude that not bailing out Wall Street will only be detrimental to Wall Street in particular, and the Financial Sector in general. The financial sector has not been helpful lately, as evidenced by their demands that we bail them out.
Therefore, I conclude that the bailout is unnecessary.
Please rebut/concur. If you've got numbers and charts (percent GDP by sector, annual capital investment by sector, etc.) you can reference, please do.\t
Hide reply Reply to this comment By OuterBeltway\t on 2008-09-23 17:36:09
It's a bifurcating system: one road is bumpy and the other leads to outright ruin. It's impossible to set a price right now because the outcomes are too divergent and the probabilities unknown.
If some kind of bailout is done and it works, the market recovers sooner and the assets might retain some value.
If everything goes to hell in a handbasket, the paper assets are only valuable as toilet paper and fire-starters.
Current market prices have to be somewehere in-between.
If an intervention can pick up assets below the "best-case" price, and then government can somehow manipulate things to get the best-case outcome, it's a win all around.
But it's damn unlikely. Government intervention will have huge unforeseen consequences. The first of which is that sellers won't offer recent market prices because they'd rather hold for the best-case outcome...
This is because the stocks aren't correlated. But in this case, if you aggregate MBS, this doesn't work - because they are correlated to one parameter - house prices.
The fact remains that a good deal sit offshore and therefore the precieved value is in the immediate exchange for USDs. The time lines are fixed (unless you unload) on the paper and therefore there is not a correlation. But rather a series of fixed points based on currency assumptions.
This is because the stocks aren't correlated. But in this case, if you aggregate MBS, this doesn't work - because they are correlated to one parameter - house prices.
"As I've said before, bring out the bulldozers and start demolishing houses vacant for over 90 days. Gotta reduce supply.."
Housing could turn around tomorrow and these assets would still have no value. The over inflated the prices then took out insurance on the asset which was also resold and inflated.
The problems in pricing have nothing to do with future home prices the problem is that we are on the tail end of a ponzi scheme.
CR, great analysis, but IMO most of it is beside the point.
The heart of the problem is, and will always be, something you discounted and even Thoma relegated to a parenthetical phrase:
(a standard lemons problem)
I don't think GS or JPM knows what a given CDO is worth.
I don't think the Treasury knows, either.
But what I'm damn sure of is that the people who are holding the security have a better notion of its relative value vs. the rest of their portfolio than the gub'mint ever can, or will.
And that means that when the clarion call goes out, these guys and everyone else are going to sell the worst and most undeserving-of-the-rating pieces of garbage in their collections and count on the fact that the Treasury won't have time to pull each one apart. Even if they don't know what it's worth to 3 decimal places, they certainly have a vague notion of whether it's better or worse than most, some, or very few of the hundreds of other nearly-identical tranches they own.
They'll keep the - well, not the 'cream of the crop', perhaps, more like 'the parts of the pig that don't go into hot dogs' - et voila ... banks get the cash, Hank and we the taxpayers get the trash. Almost by definition.
Just finished reading "The Great Crash 1929." So much of it rings just as true today.
Basically my summation is 'nothing has changed.'Bernake may have written his thesis on this same event but the script is still the same. I think we at March 1929.
Some people don't remember but people actually starved to death during the depression. We are talking about a biblical type event.
Reading the book it seems we have the same caliber of idiots running things also.
Osama Bin Ladin must be sitting in his cave and banging his head against the wall. He just realized he could have done ten times the damage to the USA if he just got a job at Goldman Sachs.
SIMPLE IDEA!!!
How about this? How about we include a provision that the managers of the tax payer funds will be INCENTIVIZED to make a profit on the assets they buy. Simple idea - turn Wall Street's greed on itself?
I am not going to pretend that I will not be hurt, because what is happening!!!
My only prayer is that I get a glancing blow as opposed to a straight on hit by the on coming train!!!
I suspect that that you are now watching history in the making, is that the accumulation of 20 years of debt coming due.
Our creditors want their money back, and maybe they will get 10%(god, I do not know) on the dollar.. We do not have the money, unless we declare bankruptcy.
The Elites and their tools (dems and reps) do not want to admit this!!! Besides, there is a few more coins in your pocket that they want to squeeze out of you before they move on.
If the monthly housing data (sales, inventory, prices, starts) continues to deteriorate - and at a more rapid pace than consensus expects - will that still have such a large impact on financial markets, as almost everything can be sent to the Treasury? Do you think traders will care if housing sales fell by 10% more than expectations? This is an odd time, even if you're an non-participant.
CR wrote: "First, this analysis assumes 100% loss severity in the event of default. If there is a 50% chance of default, half the time the mortgage will be worth $110K discounted back to the present. But if the borrower defaults, the value will not be zero since there is a recovery value on most mortgages."
Well, he was just using a mortgage as an example, however I think many of the derivative securities have a zero value in the event of default (such as one secured by a tranche that takes the hit on the first 20% loss, etc). Nitpicking the logic won't get you very far. Plug another number in if zero doesn't tickle your bean.
The other view of course, is that the market has priced this toxic waste accurately and it is worthless. Does the titan of capitalism think that the market is wrong? Are we all Socialists now?
OT, but I couldn't see this get buried in an aging thread. Props be to poster Mook.
Hoocoodanode?
(to the tune of Whitney Houstons How Will I Know?)
For five years we loaned, faster than we dreamed of
Option ARMs, subprime, 10 times income and above (mm-hmm),
NINJA loans, Alt-A, couldnt write em fast enough,
And were safe, cause really, housing prices just go up
Ooh, sales would slow (dont stop believin) hoocoodanode?
Resets would grow (never in this region) hoocoodanode?
Hoocoodanode house prices could decrease?
The loans were made with easy money,
Securitized and dumped on the Street,
Wed make a bid, but who knows about these things?
Hoocoodanode you couldnt trust Moodys?
"These CDOs? Why, theyre triple-A (risk-free)!"
Blowing a hole in our balance sheet
We say its strong, check back in a week
Dont blame me for chasing a little bit of yield now (uh-huh),
'Cause well soon be taking, another quarter of writedowns
Ooh, tell me, credit would slow (its just a feeling) hoocoodanode?
Defaults would grow (it must be the season) hoocoodanode?
Hoocoodanode our assets were fuzzy?
We leveraged up with easy money,
We passed the buck and raked in the fees,
It modeled great, but who knows about these things?
Hoocoodanode all our counterparties?
"Too big to fail" is our new cry (trés chic)
Lets ask the Fed for more Treasuries
Then take this debt, and play hide-and-seek
Ben Bernanke will you bail us out (mm-hmm),
Hey Henry (ooh) b-b-bail us out,
Fred and Fannie gotta bail em out,
Hey, hoocoodanode? Hoocoodanode? (Who-o-o?)
Hoocoodanode bank failures would increase?
Theres two or three new victims each week,
Call in the troops from FDIC,
We could be next, 'cause who knows about these things?
Hoocoodanode the markets could all freeze?
Can't sell our loans, 'cause theyre too far (off peak)
So here they sit on our balance sheet,
A big black swan, swimming up Shit Creek ...
If Bernake thinks he knows what to do, based on what was done in 1929, which I guess is the reverse.
I am not sure if he included how much the current system can be influenced by players outside of it.
The British, under Churchill, may have been big. Yet they were never equal to what weight the Mid-East and Asia can pull.
Off topic but about CDS, which I consider to be front and center if evloving this sitiation from a run of the mill recession and correction into a hair-on-fire survivalist scenario-
I was encouraged to see Cox call for immediate regulation of CDS today.
We need:
A central clearinghouse for all trades
Transparent pricing and valuation
Further standardization of the contracts
Mandatory electronic trade matching (not the half hearted DTCC effort today)
Most importantly- you should be required to own the underlying for which you buy protection- analagous to obtaining a borrow on stock you want to short.
If I could buy an insurance contract for $50 bucks a year on my neighbor's $500K house, all I need is a book of matches to get myself a big payday.
re: the FBI Investigation: "Officials say the new inquiries brings the number of corporate lenders under investigation over the last year to 26."
We should be hearing something about Mr. Mozillo soon - they have had quite a while to work on him. I wonder if he'll turn state's evidence?
Circuses indeed - first the perp walks, then the show trials... plenty of amusement. Maybe I should buy up some ad time on a few news programs and resell it in a few months - is that still allowed?
"Citizen Popeye writes:
You want a baby - or do you want a couple of more sips of bathwater............ Just askin' for those of you who seem intent on throwing both out."
Actually we're going to put it all in a VitaMix, call it nutrition, and make the poors drink it. It's the new staple of the ownership society.
What do held-to-maturity and available-for-sale mean?
Accounting standards require a Company to classify its investment in debt (bonds)
and equity (stocks) securities into one of three categories when they are purchased:
(1) held-to-maturity, (2) trading, or (3) available-for-sale. This classification is
based on the Companys intended use of that security and the classification dictates
the accounting treatment.
♦ Held to maturity debt securities that the company has the positive intent and
ability to hold to maturity are classified as held-to-maturity securities and are
reported at amortized cost. The impact of temporary fluctuations in fair value
of the debt securities is not reflected in the Companys financial statements.
Since equity securities have no maturity date, they cannot be classified as held-
to-maturity.
♦ Trading debt and equity securities that are bought and sold principally for the
purpose of selling them in the near term are classified as trading securities and
are reported in the financial statements at fair value. Changes in the fair value
from period to period are reported as a component of net income.
♦ Available-for-sale debt and equity securities not classified either as held-to-
maturity or trading are considered available-for-sale and are reported at fair
value. Changes in the fair value from period to period are not reported as a
component of net income but are charged or credited directly to equity.
I don't give a rat's ass about any of this crud. It's indefensible. They made their bets, they took their wins. The table got cold they continued to play. EF EM! Eat that turd you stupid ass hats.
CR, your cost of capital argument can be extended: what if they issue tax exempt bonds backed by their newly-purchased toxic waste portfolio, and use only the proceeds from these bonds to pay for the acquisition of the toxic waste? We would all get a vote on how to value the CESSpool (Calculated Earnings Stream Securities pool) in the form of a bond auction.
As I recall LTCM blew up when it over relied on mathmatical models for value. But value is a subjective thing not easily quantified. Small pox vaccine was worth more than gold when there was small pox around. Now that there isn't you can't give it away. Hold to maturity may not be subject to quite the same risk as technological obsolescent it isn't immune to unforeseen factors as well.
I wonder what they will use for an inflation number when they calculate present value of those securities: the government numbers or the shadowstats numbers?
hah - watching the replay of today's senate hearings on CSPAN 3 right now.
My wife, who has heard me rant on all this, is watching Paulson and Bernanke acting like muppets and her reaction is something akin to "what the f-- is this bulls---!!!"
A lot of folks seam to be assuming the the plan is mismanaged.
FT had an article several months ago explaining why Markit prices on "AAA" securities were a lowball estimate of value.(Natural sellers overwhelm natural buyers of protection)
My guess is the purchase of "AAA" securities that are trading at 60 for 80 by the government would help the economy and ultimately cost nothing.
All of the negative reaction reminds me of the Mexican Bailout which was unpopular and heavily cricitised but helped the economy and was profitable.
They didn't get into any of this which they should have since it is conceptual.
It seems reasonable to apply at least reversion to the mean in terms of historic RE valuation metrics. Are many of the current accounting marks incorporating this approach?
I suspect a popular discount in the real market for this stuff is the complexity discount. I suspect the buyers perform rough calculations and apply this complexity discount. It seems the government should do the same.
Mel,
You makes your choices and you get your results. You wanna sink the boat ? hmmmmm, maybe I don't want you in my life raft afterall.
Citizen Popeye | 09.23.08 - 7:58 pm | #
I come with spinach. I don't think this plan will work--neither do the salesmen. We need a plan done by those not involved with the causation.
"4 on a scale of ten? Or does this disaster go to 11?"
Oh this one goes to 11. And that's not level 4.
If this shite is so friggin' tasty, why are we even having this discussion. It's a nothing burger. So this must not be the case with BS Bernutty and Hanky running around throwing out 3 page legislation packages for $700B.
No friggin' way. Something's afoot.
Remember Bernutty said they want to buy seconds...seconds!!!!! Sorry those ain't ever gonna be worth shite.
Is good ol' conservative lender witha shit pile of seconds WF gasping for air?
My wife this morning finally finally figured out that it would currently be economically advantageous to walk away from our Phoenician 2005 edition debtburg.
Man is she pissed. Our 20% down, dust.
She wants her bailout, Paulson, and she wants it now!
Put that in your GS retirement fund!
Loss severity if we walked away- 100% on the Heloc, around 25% on the first- with a 20% down purchase!!!
In a "stable area" of Phoenix, not an exurb.
Million four foreclosure is right up around the corner from me, overlooking the preserve with a broken window right behind the custom ironwork massive front doors, and dead grass. Now zillowing at 800k and going lower by the day.
THE ONLY WAY WE GET HIGHER REAL ESTATE PRICES IS FROM MUCH HIGHER WAGES, OTHERWISE THE FED IS PUSHING ON A STRING AND COLLAPSE IS UNAVOIDABLE!
vicjim, the "AAA" rating is the original rating on those, not the current rating. The losses have already extended far deeper into the tranches than originally anticipated, and the counterparty risk of those who added credit enhancement is much higher than originally perceived (and priced).
Many "real economy" firms use borrowed money to fund operations, pay employees, "build"/purchase inventory, etc. This money comes from the credit markets, such as borrowings from commercial banks, or sale of commerical paper to investors (money funds, for example).
My understanding is that the banks are obliged to reduce their loans outstanding as their regulatory capital declines, and their capital losses have also made them more risk-averse and reluctant to lend into the real economy. This is the credit freeze that is terrifying HP/BB and presumably also some in Congress.
It isn't simply banks that are leveraged. Many real economy companies are also leveraged --- dependent on borrowed working capital to operate. For example, Ag producers use borrowed money to finance seed, fertilizer and fuel. Their net profit after a year's operation is not sufficient to fund the next year's operations (and their multi-year retained earnings in many instances are negative, I suspect--- borrowings
can fund losses as well as operations). So failure to unfreeze the credit markets is likely (certain?) to result in a contraction in the real economy. And that could become self-perpetuating, as reduced consumer expenditure (due to layoffs) results in reduced demand for goods/services and more layoffs, a death spiral and Great Depression II.
So this is scary stuff. Congress must do something, but it needs to get it right to minimize the negative unintended consequences. If HP spends too much fixing the banks, he might, in a really awful scenario, un-nerve international lenders, collapse the dollar, explode Treasury's cost of borrowing, and provoke a default on US sovereign debt.
The President is pissed...he has sent the Vice President to "call on" reluctant members of the Republican Party....
From the FT front page:
What the vice president and others will emphasise is that this is absolutely necessary; in no way should it signal any abandonment of the belief that our markets work and our free market system works, said Tony Fratto, White House spokesman.
He added that it was unthinkable that Congress would fail to agree the measure this week and that the leadership on both sides had given assurances to that effect.
So if Bernanke is worried about "punitive measures" (i.e. executive compensation limits) as disincentive for firms to take advantage of the bailout, can't this be solved by applying these "punitive measures" industry wide (to the entire short sale list)?
Dow and S&P go down 15%, houses bob down on an elastic string in places and drop another 15% and then taxpayers get burned, and growth slows for 5 years, then things recover slow. Inflation will keep cost of living uncomfortable and all the crooks go free. Show is over, move along!
i fail to see why so many smart people are uncertain about future house prices. seems that they will need to fall until they are at or near historic relationships with incomes? any ideas why someone would believe something else, other then perhapse wishfull thinking.
All Futures contracts are "held to maturity", i.e. at expiration, some small number of say corn contracts are actually "delivered." However some 90% or better are just traded back and forth during the price discovery process.
Thus, Bernanke is using an academic argument not a practical argument. Unless you have an actual use for a Mortgage Security, say a pension fund who is trying to fund a certain set of liabilities, to talk about "held to maturity" pricing is nonsense as the government is not planing to hold the assets.
To use the corn example, a farmer and food producer are commerical users of corn. They have a use for the corn and everyone else in the market is a speculator.
The US Government has no commerical use for a Mortgage thus, it is operating like a speculator.
The position it is speculating on is the future volatility of the US mortgage market.
The Treasury is recapitalizing the losers by taking their short volatility positions and hoping that they can manipulate the market through their size in hopes of reducing the volatility of the matrgage market. In addition, they intend to recapitalize the losers so they can go out and make some more short volatility bets, i.e. lend to insolvent borrowers.
Mish posted that Sen Shelby is the roadblock in Bush & Paulson's all out push to ram this bailout up our collective asses.
PLEASE contact him and the other "fence sitters". (Stolen from Mish)
Fax Title "Senator Shelby, Block This Bill"
Senator Shelby
You are correct when you say the crisis was created by "sloppy underwriting and reckless disregard for the risks they were creating, taking, or passing on to others."
Most importantly you are correct when you state "There are no credible assurances that this plan will work. We could very well spend $700 billion and not resolve the crisis."
Senator, the odds of failure are 100%. The Paulson plan will not create any jobs or help homeowners pay their bills. Instead it diverts $700 billion of taxpayer funds to failed banks that took excessive risks. The sheer size of the bailout will cause interest rates to rise, further adding to taxpayer woes.
Robbing taxpayers to pay failed banks cannot possibly work!
Printing money and giving it away cannot work either. If it did work, Zimbabwe would be the most prosperous nation in the world.
Senator Shelby, our prayers are with you that you have the courage to stand up for what you know you must do: Block This Bill.
I ask that you approach fellow Senators Jim Bunning, Chuck Grassley, and Jim DeMint in hope that one or more will have the courage to join you to in preventing what is still a preventable disaster.
Your Name
Your Phone Number
Fax For Bunning, Grassley, DeMint, Ensign, Reid
Dear Senator
Earlier today I asked Senator Richard Shelby to have the courage to stand alone, if necessary, block the Paulson proposal.
Senator Shelby is correct when he states "There are no credible assurances that this plan will work. We could very well spend $700 billion and not resolve the crisis."
Senator, the odds of failure are 100%. The Paulson plan will not create any jobs or help homeowners pay their bills. Instead it diverts $700 billion of taxpayer funds to failed banks that took excessive risks. The sheer size of the bailout will cause interest rates to rise, further adding to taxpayer woes.
Robbing taxpayers to pay failed banks cannot possibly work!
Printing money and giving it away cannot work either. If it did work, Zimbabwe would be the most prosperous nation in the world.
Senator, our prayers are with you that you have the courage to stand up with Senator Shelby and do what you know you must do: Block This Bill.
Your Name
Your Phone Number
Sen. Richard Shelby (R) 202-224-3416 or 202-224-5137 (both seem to work, I fax both)
Sen. John Ensign (R) 202-228-2193
Jim DeMint (R) 202-228-5143
Sen. Jim Bunning (R) 202-228-1373
Sen. Chuck Grassley (R) 202-224-6020
Sen. Harry Reid (D) 202-224-7327
Comrade Misean: It was a response/parody comment of one above it.
I do not expect any of these dudes to fix anything. But my reasons are different than most. I don't believe they are stupid or incompetent; I think their motivations are different than what we are taught to expect.
My great grandfather went to his bank and withdrew all his money just prior to Roosevelt's bank holiday. He loudly proclaimed that anyone in their right minds would do the same. God loves a rebel.
Bid also depends very heavily on cost of capital, or your investors required IRR. The distressed buyers of broken development deals are pricing to a 30% IRR due to the all equity nature of deals these days (no debt available).
I guess Paulson's cost of capital is the risk free rate, so there's another guarantee they will overpay!
"Remember Bernutty said they want to buy seconds...seconds!!!!! Sorry those ain't ever gonna be worth shite."
Comrade Misean: I couldn't agree more. I am beginning to doubt that there is a single second loan on single family housing that is still above water. If there is, it won't be for much longer.
Comrade DialM
Agree with your comment. I was assuming the securities purchased would have substantial losses and the credit enhancement is questionable.
However, the supply/demand characteristics of the market, trading action of the Markit prices the last 5 months and a common sense look at real estate markets hints the purchases could be profitable.
Clearly they should avoid securities that were orignally poor quality or are dependent on bond insurance to be attractive.
Many "real economy" firms use borrowed money to fund operations, pay employees, "build"/purchase inventory, etc. This money comes from the credit markets, such as borrowings from commercial banks, or sale of commerical paper to investors (money funds, for example).
My understanding is that the banks are obliged to reduce their loans outstanding as their regulatory capital declines, and their capital losses have also made them more risk-averse and reluctant to lend into the real economy. This is the credit freeze that is terrifying HP/BB and presumably also some in Congress.
It isn't simply banks that are leveraged. Many real economy companies are also leveraged --- dependent on borrowed working capital to operate. For example, Ag producers use borrowed money to finance seed, fertilizer and fuel. Their net profit after a year's operation is not sufficient to fund the next year's operations (and their multi-year retained earnings in many instances are negative, I suspect--- borrowings
can fund losses as well as operations). So failure to unfreeze the credit markets is likely (certain?) to result in a contraction in the real economy. And that could become self-perpetuating, as reduced consumer expenditure (due to layoffs) results in reduced demand for goods/services and more layoffs, a death spiral and Great Depression II.
So this is scary stuff. Congress must do something, but it needs to get it right to minimize the negative unintended consequences. If HP spends too much fixing the banks, he might, in a really awful scenario, un-nerve international lenders, collapse the dollar, explode Treasury's cost of borrowing, and provoke a default on US sovereign debt.
SRC | 09.23.08 - 8:06 pm | # "
"WASHINGTON -- The FBI is investigating four major U.S. financial institutions whose collapse helped trigger a $700 billion bailout plan by the Bush administration, The Associated Press has learned."
I had to work today, I missed a bunch. I did try to follow the hearing this morning. Was it my imagination or was Bernanke's lip quivering like he was going to cry early on? He looked scared to death...Which isn't comforting...
Also, J6P is fully awake. Every customer that came in the bar today was discussing the bailout and they are NOT happy campers...
mmckinl: Two years later a delegation came to him and asked him, no begged him to take his money and re-open the bank. He did, after extracting some concessions (some of which I benefited from fifty years later). Fuck 'em.
That's a plan, and maybe that is the one that Congress will elect. I don't pretend to foresee the consequences. To quote Gandalf in LOTR/FOTR
"Nothing is certain. Not even the very wise can see all ends."
But I'm glad that Congress is debating this and not rolling over in terror. We may get a very bad plan, but it will probably not be as bad as what Paulson tried to ramrod through. That's all I mean by "getting it right." All roads may lead down from here, but some lead to a lower bottom than others.
Comrade Kristina writes:
I had to work today, I missed a bunch. I did try to follow the hearing this morning. Was it my imagination or was Bernanke's lip quivering like he was going to cry early on? He looked scared to death...Which isn't comforting...
The tape will be played at his trial and he knows it ...
Here was Lawler Econmic & Housing Consulting's take
Fed chairman Bernanke confirmed taxpayers worst fears that the Treasurys proposal would involve paying above-market prices from financial institutions. In wording that shocked market participants and academicians alike, chairman Bernanke said the following.
I believe that under the Treasury program, auctions and other mechanisms could be devised that will give the market good information on what the hold-to-maturity price is for a large class of mortgage-related assets. If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.
Now what the hell is a held-to-maturity price, and how in the world can an auction of other mechanism be devised that gives the market a good idea on hold-to-maturity prices since there is no such thing? Of course, everyone knew what he meant: held-to-maturity means above market. Why doesnt he just say that? Why dont he and Paulson just say that the Treasury plans to spend taxpayer dollars to purchase mortgage-related (and possibly other) assets from financial institutions at prices that exceed where the Treasury could then turn around and sell them? Why use such silly terms as hold to maturity prices? Or why not simply have the Treasury be the auctioneer coordinating the auction of distressed mortgage assets of financial institutions, but state that only hold-to-maturity investors can participate? Wont THIS tell us what a hold-to-maturity price really is? (Of course not!!!)
Bernanke went on further to say the following.
First, banks will have a basis for valuing those assets and will not have to use fire sale prices. Their capital will not be unreasonably marked down. Second, liquidity should begin to come back to these markets. Third, removal of these assets from balance sheets and better information on value should reduce uncertainty and allow the banks to attract new private capital. Fourth, credit markets should start to unfreeze. New credit will become available to support our economy. And fifth, taxpayers should own assets at prices close to the hold-to-maturity values, which minimizes their risk."
For those of you who did not see the testimony or read the transcripts, you are probably wondering if Im joking about what he said including that last sentence, which borders on the inane. After all, no educated economist would believe any of what he has purported to have said; rather, what he said is something you might expect from a banking trade group looking for a bailout. Yet sadly, he DID say this, even though there is no way he really believes it. As I believe Bagehot once said, panics produce prevarication from policymakers at precisely the point that precision should prevail.
Needless to say, this program is horrendous: it involves transferring wealth from taxpayers to financial institutions, with the hope that the benefit to financial institutions might eventually trickle down to taxpayers. An unambiguously better solution to deal with the current problem would be a second-round economic stimulus plan that would immediately send to all US taxpayers $5,000 which would be close to a $700 billion stimulus. The $5,000 would be to ALL taxpayers; NO add-ons to the bill would be allowed; and it would go into effect immediately. Sure, the impact would be inflationary good! But if government officials could convince the public that this action was a one-time stimulus (with the Fed purchasing the Treasury debt issued to fund the payments) in order to deal with this one-time problem, then its possible that thered be just a one-time jump in goods and services prices, and NOT an increase in the publics expectations for long-term inflation. This plan would (1) stem the decline in nominal home prices (but not necessarily the decline in the relative, or real, prices of homes); and (2) provide immediate funds to troubled home owners with mortgages. The benefits of such a plan would surely trickle up to financial institutions!!!
Sorry but it seems like everything Bernanke does can be explained by this:
(i) Bank failures caused the Depression.
(ii) If we let banks fail, there will be a depression.
(iii) A depression must be avoided no matter what the cost.
(iv) Ergo, bank failures must be avoided no matter what the cost.
For a supposed great student of the GD Bernanke really seems clueless. Either that or he just thinks everyone else is stupid.
Stunning they are all attacking mark to market accounting. I mean really truly stunning. It's like a basic tenat of accounting.
Next we are going to say it is stupid to count expenses on the income statments of development stage companies. Why should they be forced to report losses before their business is really up and running - so silly you capitalists.
This is a battle for the future of the Country - period.
I thought Bernanke meant the face value of the note. That is the principle plus accrued interest, which seems ridiculous. And, are they only talking about buying mortgages, or are the going to buy all the other junk? (Swaps, etc.) I suspect their value is zilch right now.
Mixed in with these packaged loans / bad assets, there are plenty of loans that have little or no value.
An example would be a 100% loan that was made on a condo in Southern California between 2004 and 2006. There are properties here that have lost a full 70% of their value - many properties in fact. An example would be a property that sold in 2005 for $330,000, that is now worth less than $100,000.
Also mixed in these loan packages are 20% 2nd mortgages, where an 80/20 loan was done, and the property value has fallen by 30% to 50% or more. That 2nd mortgage has zero value. So it doesn't matter if the loan is held to maturity or not - the property will be foreclosed on, if it hasn't been yet, and there will be little or nothing left for the bondholder.
Comrade Misean, $700 billion can capitalize one big ass bank or 10 Wells Fargo sized ones so the issue isn't necessarily Paulson or no credit.
The taxpayers could, for example, take Caterpillar commercial paper instead of WAMU loans as collateral for a loan. Even farmers could received loans direct from a USG lending agency. I may not like the it but it may be preferable to using bankrupt and incompetent banks to finance our economy and taking those banks worthless assets as collateral.
I appreciated dk's comment @7:08 about his walk to work in Manhattan...here's what I see in NW OR...we have a Koch brothers paper mill that is the largest employer in the county, so far it's hanging in there.
Lots of theft around here of scrap metal, from construction sites and even a local Lewis and Clark statue was stolen for scrap, eventually recovered but already cut up.
The local Ax-men are still in business, a lot is due the December 07 storm that left many downed trees, but they're not getting good prices because of the slow down in construction...speaking of which, a friend who's a builder said crews have been coming down from Portland and underpricing local crews because of the slowdown in Portland and suburbs. A number of Portland builders going BK and one guy holding auctions of empty developments to raise cash.
How is $5B actually transferred from Buffetts to GS'? I've seen some big checks and wire transfers, but nothing over a billion, I'm quite sure. What are the mechanics of tranferring that much money? Just a push of a button and transfer from one account to another?
"Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out, and by the grace of the Eternal God, will rout you out. "
Andrew Jackson quotes:
CR from Dodd plan
(3) ACQUISITION OF SECURITIZATION POOLS AND MORTGAGE LOANS.The Secretary shall, to the
12 extent practicable, acquire
13 (A) sufficient ownership or control of
14 pooled residential mortgage loans, or a
15 securitization vehicle for such loans so that the
16 Corporation has authority to modify the under-
17 lying residential mortgage loans, either directly
18 or through a designee; and
19 (B) whole residential mortgage loans, so
20 that the Corporation may use its authority to
21 modify the underlying residential mortgage
22 loans, either directly or through a designee.
If I understand this and I surely may be wrong, the idea here seems to be to gain control of the pool (I assume this would mean reuniting the several
levels of risk sold).
Then working within the pool and without try to heal the loan. This would also allow a fair market value to be established.
This seems fair which probably means it wont get done.
Also I understand that the earlier (pre-2006) loans are not in as bad shape as later ones. Perhaps working upp historically will allow the freeing of at least some assets
The economic establishment (all of them reactionaries/hypocrites) believe the Great Depression of the '30s was caused principally by two factors: 1)high tariffs imposed after the Depression began (self-severing argument); 2)the Federal Reserves' failure to flood insolvent banks with money. While the second point has merit (of course 1000s of banks failing destroying all of peoples' savings played a huge role in the Depression), these mainstream economists will never admit to the broad drop-off in aggregate demand caused by deflating asset prices and how flooding banks with money in no way resolves the consumer's propensity to take on new debt - hence why I'm a deflationist. They can "print" all they want, but unless it's literally handed out to consumers it won't stop the aggregate depressionary effects of collapsing asset prices.
Mark to Market? What the hell? Who cares when Professor Thoma goes to the market? Is this sorta like big brother watching some pinko lefty professor from Oregon?
I've wondered weather the USG could become the lender of first resort. I think it wouldn't work. One of the functions that banks perform (all those loan officers) is to evaluate and price the credit risk of would-be borrowers (small businesses, or home-buyers). I don't see how the USG can do this without hiring all the people who do it now. And to skip that step would be kind of what the mortgage originators have been doing in recent years.
Better to nationalize the banks and take over the risk pricing function that way. That might work (in my fevered imagination)
It just hit me. The Chairman of the Federal Reserve testified before Congress today that he wants the US taxpayers to buy up to 700 billion of 'troubled' bonds, MBS,CDS,etc., not at mark-to-mark prices as required by the SEC and GAAP, but at prices above their current listed value on the books.
If ANYONE else tried to do that, they'd be indicted.
WHY is this man not fired or forced to resign tomorrow?
Comrade Bernanke is to be excused for his apparent confusion. The military have a phrase that applies to the current situation: "Fighting the last war."
Ben has done a heck uv a job preventing what happened in 1933. Way to go.
"Comrade Misean, $700 billion can capitalize one big ass bank or 10 Wells Fargo sized ones so the issue isn't necessarily Paulson or no credit.
The taxpayers could, for example, take Caterpillar commercial paper instead of WAMU loans as collateral for a loan. Even farmers could received loans direct from a USG lending agency. I may not like the it but it may be preferable to using bankrupt and incompetent banks to finance our economy and taking those banks worthless assets as collateral."
Yes...but ef 'em. This country's entire structure needs a credit diet. Get on the treadmill boys.
I'm in an extreme Super Colander Tin Foil Hat snit right now. I'm plugged into the twin 12v auto batteries right now.
Cheney has been dismissive of Congress for nearly 8 years. It may come back to bite him in the ass.
from the Miami Herald...
n the House, Republican members met privately with Vice President Dick Cheney and White House Budget Director Jim Nussle in what was described as a tense session.
"People want to try to enjoy capitalism on the way up, socialism on the way down, and we know where that is headed," said Rep. Jeb Hensarling, R-Texas. "What we will end up with, I believe, is less freedom, less opportunity for the next generation."
Whether such anger will erupt into the kind of backbench rebellion that forced negotiators in the 1980s and 1990s to make changes in tax and budget deals remained unclear.
"I think it wouldn't work. One of the functions that banks perform (all those loan officers) is to evaluate and price the credit risk of would-be borrowers (small businesses, or home-buyers)."
Man I ain't picking on you, but if those asshats had done their job we wouldn't BE HERE. Besides they computerized it to a large extent.
Not saying gov't would do a better job, but there ain't any talent out there to hire anyway.
Well I'm not exactly in favor of making the USG the lender of first resort because loans would be 'politicized'. Still the bogeyman that Paulson trots out of a total credit freeze if we don't buy the assets of the Wachovia and WAMU is designed to stampede the Congress into approving accepting bad debt from bad banks.
Surely there are some competent bankers out there with solvent banks who could take over the insolvent banks with government capital and operate them with sound lending practices.
Why do the boards and management of today's bad banks have to be saved? Lets find some new Stan O'Neils and Chuck Princes. They might be in a local bank in Amarillo or Lansing.
Again, a good point. But I think that someone trying to price risk may still be better than no-one. Need to get the incentives right, of course. That's part of what went wrong in the mortgage-origination debacle.
HTM pricing is about as sound an idea now as it was when the ARM's and 0 down loans were first accounted for as revenue on the books of the lenders.
If 10-15% of these loans are not paying now, how is transferring them from the books of WAMU, etc. to the USA changing the fact they are non-performing?
You know the guys selling their houses who haven't come down from their 2005-vintage prices because they "don't want to give their house away?" That's the "hold-to-maturity" price. Bernanke must think the taxpayers will get "instant equity."
SRC, I've been wondering the same thing. For revolving credit, usual course of business, sort of thing I think a direct loan set up could work short term. (6 months or less).
It would take affadavits, certification of credit history, usual revolving loans with a financial entity who has suddenly inexplicably withdrawn credit. Best case, the bank itself certifies that this is a usual customer with good credit in an ongoing relationship.
That seems more straightforward to me than buying troubled paper, esp if the goal is to keep employment up too. Of course it doesn't give prize money to GS and other pirates.
As an aside, I have not had electricity for 11 days in Houston since Hurricane Ike. Any chance the media might want to cover the 4th largest U.S. city being without power for half a month?
I already know of 3 small businesses which have gone OUT of business because they could not operate without electricity. Also, Houston just reported the largest decline in home sales EVER for the month of August.
I cannot imagine what is going to happen to September home sales when a very large portion of Houstonians are still without power. CRRRAAAAAASSSHHHHHHHH!
I think today turned a major bend in chopping this plan down to size. Both McCain and Obama shifted quite a bit today in the direction of Main Street.
Remember that Hank and Ben engineered Bear Stearns, Fannie & Freddie and AIG without asking Congress for bumpkus. They could still make a lot of waves without Congress, but not if they have their hands tied in knots.
You may start to see them pull away from this whole plan. It's not in their interest to rouse the rabble against Wall Street, get caught in a politial cross fire, or find themselves under Congress' microscope for two years.
This was a very bad day for their team, and they know it. But apparently, the markets don't know it yet.
Even if they pull back on the plan, they succeeded in giving markets more juice last week with the announcement. I'm convinced that was half their goal anyway.
I'm not sure how many well-capitalized banks there are, and even if there are lots, they may be fully extended (if well-managed, they probably are --- fully invested to maximize return to shareholders) in terms of what they are allowed to lend (regulatory capital constraints).
Depending on how much toxic waste is on bank balance sheets and what its true present value is, the 700$B might be a significant fraction of the capital in the entire banking system? I don't know --- I'm inclined to think that it probably is, otherwise the HP/BB plan couldn't make much of a difference. Can someone better-informed shine light on this?
But I don't think that the sound banks are able to take up the needed credit-extension function unless they get extra capital infusions, again because of lending/regulatory capital limits.
I think we need to keep phones of our Senators/Congress People ringing off the hook to get a decent bill passed. All the pols I saw on TV tonight looks scared shitless and that is because of the outrage they have heard from the people (that would be us). We cannot get complacent. We need to make sure we don't let that Jackass paulson pull this off. It was so clear watching this tonight that he is a complete asswipe. I was actually hopefull at first, but he is basically saying, 'yeah, this is f'd up, but it is better than the alternative'. This is what a mugger says . . .'Give me your money or you will get shot'. It is the same damn thing and American (or any decent person) should not stand for it.
First, I really think there is no crisis. Oh noes,banks failing! To the printing presses!
However, if you do believe there is a crisis, and the govt needs to intervene, there is a model - the FSLIC assistance package - that can eaily be tailored to the current situation:
Capital loss coverage. Split the losses 80/20 with the govt.
Interest rate subsidy. Govt guarantee a rate, say 6%, on the underperforming paper. This could done on a sliding scale, 6% in period one, 5% in period two... This keeps the holder from holding indefinitely.
Tax benefit sharing. Ti the extent that tax loss carry forwards are created, the co's have to share the benefit.
--
Jas Jain Plan for Revival of Main Street America
Every American should get premium prices for all the junk that he, or she, has accumulated over the years.
We would have some $3Tr. in readily spendable money.
For full disclosure, Jas Jain will sell all his US Treasuries and close all short position in the Scam Market before the Plan is publicly proposed and considered by the US Congress.
you have my sympathy but you folks in Houston didn't loot your city or flood into Dallas looking or have incompetent local officials in need of Federal help. Therefore you don't exist in the eyes of the media even if Galveston doesn't have electricity by Christmas.
They'll pay attention only if you don't keep your refineries down long enough to affect gasoline supplies on the East Coast. THEN IKE will be a national story.
Because of all the people that think this is not going through, I have restocked the shelves with my product. When Americans are ripped and bloody there is nothing more soothing than Auntie Bushka's!!!!!
Did anyone else notice HPs reaction when questioned about the inclusion of section 8 in their proposal? Sat straight up, stammered a bit and proceeded to not answer the question. Also he stated numerous times in his testimony that he didn't want to be there, or I wish I wasn't here. Is it unreasonable to suggest that section 8 was HPs" immunity from prosecution" clause. Whatever form this bailout takes(given who they're bailing out- GS etc.) hanks hands are going to look dirty. when the masses start looking for a scapegoat HP is gonna look awfully inviting. Anyway my guess is no section 8 and HP resigns as treasury sec.
All the old companies on the street
They don't stand a chance don't you know
If you short them too quick (oh whey oh)
They're falling down like dominos
All the trader men in the pit
They tanked the economy on a bet
Gold krugerrands (oh whey oh)
Can't be bought on credit
Sovereign funds with their Fannie bonds say
Ay oh whey oh, ay oh whey oh
Bailout from Paulson
Blonde money honeys with their calls
They spin the party line on CNBC
But the panic shows (oh whey oh)
Their voices crack as Asia falls
All the market makers talk their books
The sell into the rally don't you know
When the closing bell rings (oh whey oh)
They're collapsing like a Lehman
All the MBAs at the trading desk say
Ay oh whey oh, ay oh whey oh
Bailout from Paulson
Watch all the blood on the street
Clean out your desk then head out the back
Life is hard you know (oh whey oh)
You trade your Porsche for a Pontiac
If you want to find all the shorts
They're waiting for your stock to drop
They take their chance (oh whey oh)
Roll the dice on a bailout flop
All the carry traders with their yen
Insurance companies calling Paulson
And the Chinese fold (oh whey oh)
They need a bailout from Paulson
All the shorts on the market drop say
Ay oh whey oh, ay oh whey oh
Bailout from Paulson
Bailout from Paulso
Fortunate Son -- not even sure if you need to change a word:
Some folks are born silver spoon in hand,
Lord, dont they help themselves, oh.
But when the taxman comes to the door,
Lord, the house looks like a rummage sale, yes,
It aint me, it aint me, I aint no millionaires son, no.
It aint me, it aint me; I aint no fortunate one, no.
We need to obtain the valuation calculation and assumptions from some of the few real buyers of this crap paper. Maybe one of them will step forward for the benefit of our country.
"Austrian's have been screaming about the bubble since '03. "
In Dr. Kurt Richebacher's newsletter, he bluntly described the housing bubble, who was blowing it, how to recognize it, why it was done, and where it would lead, in 2001. That's right, 2001.
CR from Dodd plan
(3) ACQUISITION OF SECURITIZATION POOLS AND MORTGAGE LOANS.The Secretary shall, to the extent practicable, acquire (A) sufficient ownership or control of pooled residential mortgage loans, or a securitization vehicle for such loans so that the Corporation has authority to modify the under lying residential mortgage loans, either directly or through a designee; and
Many of the Pooling and Servicing Agreements of these securitizations cap loan modifications to 5% of the aggregate principal balances of the loans outstanding. Additionally, the PSA will not allow amendments that benefit one certificate holder over another, without all affected certificate holders agreeing to the amendment. Changing this cap will affect certificate holders differently, and since some will be affected adversely, it is likely that Treasury would have to purchase all certifcates of a securitization, even the equity, to get the amendments through.
But then again, the Treasury could thow out the law of contract and just do whatever it wants.
I've been puzzling why Paulson would propose legislation which is so obviously dictatorial, extra-legal and dangerous, even with the careful orchestration of the Lehman Brothers/Reichstag Fire.
I think I've just figured out why they are doing it.
All the Fed's alphabet soup of emergency liquidity facilities innovated over the past year were structured around repurchase agreements. Toxic waste securities were used as collateral for US Treasuries and dollar credit at 85 percent of face value. But as each facility expires, it has to be rolled over and increased to keep pace with the implosion of credit in the interbank markets. Well over half the balance sheet assets of the Fed have been loaned out in this way, perhaps a critical amount in excess of this estimate. Without recapitalisation, the Fed is at risk of failure in the midst of this crisis. Its Enron-style accounting for the toxic waste makes it very vulnerable to a default by any of the repo counterparties it oversees and limits its ability to enforce any constraints as well.
The Paulson plan will provide a one off opportunity for banks to take their toxic collateral back and sell it at a Paulson-determined price for cash. He issues Treasuries to finance the plan which increases the supply available. He selectively decides winners and losers, of course in making the scheme available and pricing assets, creating arbitrage opportunities and survivor bias in the process.
In the meanwhile, the removal of the toxic waste from the Fed balance sheet and redeposit of Treasuries and cash as the repos unwind gets the Fed off the hook for having hypothecated most of its assets against worthless toxic waste at Enron-styled false valuations.
If I'm right, the Paulson Plan recapitalises the Fed without ever publicly admitting that it was dangerously overextended."
Would it be possible to enact a law mandating public disclosure of the actual performance --- interest and principal payment histories of the underlying assets --- of all SIVs?
That would seem to aid the price-discovery mechanism.
Perhaps it would also drive the banks out of business.
Last comment for the night - there comes a point at which trashing every solution that is offered meets it's maker. Trashing creates trash, and more trash... and nobody is being paid to pick it up.
Upthread Nades pointed out that during the last depression, people starved to death.
You want Armageddon ?? It's clearly there - if that's where you really want to go.
Final thought - - if we don't take this chance - - how many more will we be offered ???
I assume an economist like Bernanke with some finance knowledge knows what a "discount rate" is. I think many economists and analysts, some on CNBC, have no bloody clue.
I called congress again today, took several tries to get through, switchboard was very busy (good thing!) and I spoke to one senators office and one congressmans office.
Both oppose the current bill vehemently and want to take time to learn and craft an appropriate response.
I suggested they move to express a lack of confidence in Bernanke, he has either lied to Congress or he is inept (Containment), and Congress needs to hear from people who predicted that this would happen, and listen to their proposed solutions.
I will be calling again tomorrow - the calls are working. Keep it up! Congress is taking the time to step back, learn, question, debate....all because people are making a racket. If we wern't they'd just assume we didnt care, pass it and move on.
Why is the hold-to-maturity price higher than the market price? Because there are not enough private investors with the same liquidity profile as the US Treasury. Most of these assets have longer maturities, and most private investors believe they may need their capital back for other purposes before this stuff matures. Since there is no confidence that there will be anyone else to take them out prior to maturity, they don't bid at all, or at best bid a price where they can live without liquidity. The Treasury can afford to wait, so they can pay more than the average private investor and still get a fair deal.
Buffet gets $5B in preferred stocks of Goldman Sachs (for comparison that's almost 100% of WaMu's current worth), plus $5B in common stock options.
Mitsubishi UFJ yesterday announced they will buy a 10% to 20% stake in Morgan Stanely, one of two major investment banks left standing. This is on top of the 9.9% stake China bought last December.
McCain's campaign manager Rick Davis
John McCain is allegedly mistaken when he said his campaign manager had no involvement with Freddie Mac "for the last several years". Rick Davis's firm was paid $15,000 a month in 2005 until the takeover - allegations are Rick did no real work in return for the money: NYT: McCain aide’s firm was paid by Freddie Mac - The New York Times- msnbc.com
From the New York times. McCain probably didn't know and doesn't care.
More than 3/4 of Americas concerned, believe bailout benefits crooks
Sep 19-21 poll shows 79% worried about inaction, 77% believe the bailout would benefit those responsible for the downturn in the first place: Poll: Needed financial bailout rewards bad behavior - Sep. 23, 2008
This is why knowledge and awareness is so important. I don't want inaction either, but we're being given only 1 choice right now and that's the bailout route. We need to take the route of responsibility and tighten lending standards and stop manipulating the bubble. If credit is the issue, then set aside money to lend to banks in return for valuable collateral - don't buy the riskiest collateral when the housing bubble is still deflating. And don't reward investors who've only owned these financials for mere days or weeks, at the cost of the honest banks and taxpayers.
My Proposed Solutions:
* Enforce sane lending standards once again like income verification and non-exotic loans, standards that Credit Unions and surviving banks practiced
* Provide liquidity to honest banks that have legitimate short term needs with short term loans based on solid collateral
* Prosecute career criminals who intentionally perpetrated the worst of the housing frauds
* Work with banks to find responsible ways to resolve mortgages, as long as those people live in those homes, have been making at least some payments (rather than none at all), and have the ability to reasonably afford the home they live in.
* Don't bail out flippers, fraudsters, straw buyers, speculators, and people who bought homes they knew they couldn't afford by lying on their applications.
* Restore confidence to the market through calm words and actions, react to facts and search for sensible alternatives to more of the same.
There's nothing to like about the blank check, but it appears that that is not what we will get. There will be equity participation (though that may deter future private equity inflows) and Congressional oversight.
Doing nothing may result in a great depression --- I don't understand the degree of leverage in the real economy to confidently predict, but I think that most companies have to borrow at some point in their annual cash-flow cycle. If credit shrinks to the present statutory multiple of regulatory capital in the banking system, there will be significant, perhaps massive, contraction in the real economy.
Perhaps what is needed is gradual deleveraging of the real economy. THat might mean a lower long-term level of output and lower living standards. I'm OK with that. Doing something now, if it is effective, will buy time. Will we use it wisely? I hope so.
I'm inclined to agree with popeye that to simply say "F"-em and wait to see what actually happens, may be deeply unwise.
capital geek writes:
Why is the hold-to-maturity price higher than the market price? Because there are not enough private investors with the same liquidity profile as the US Treasury.
oh BS ... many of these traunches are worthless now and with falling home prices more are becoming worthless by the day ...
[White House Deputy Press Secretary Tony] Fratto said it would be "unthinkable" for Congress not to pass legislation this week, asserting the result would be a "very, very serious situation" for the U.S. economy.
......
Fratto insisted that the plan was not slapped together and had been drawn up as a contingency over previous months and weeks by administration officials. He acknowledged lawmakers were getting only days to peruse it, but he said this should be enough.
Have you guys already seen this? MONTHS? I don't know why I'd be surprised...
Popeye: It shouldn't be this solution or nothing. Many have proposed ways to deal with this, yet we are told that either Hank blows a tril or we all starve.
So it's bailout or bust?
The truth is, if Hank blows a tril we probably starve anyway.
In other words, if you are going to be beaten to death, it is not better to be sodomized first.
Dude, totally unfair to ask Bernanke a tough question like that! Beta on portfolios?
C'mon, give the guy a break. After all, he is "just a Professor of Economics"
Frankly, waterboarding and death are too good for both Bernanke and Paulson. Bernanke is in way over his head and his refusal to admit this is costing our country dearly. Paulson knows exactly what he is doing.
Tranches...senority....vintage....blah, blah, ablh...the underlying assets mean squat. There is no market because the market changes each morning. Each day someone else looses their job, gets sick, says I've had enough....The value will bottom before folks think and that is when we can build a foundation for value. As an appraiser, it is worth what someone is willing to pay for it. Right now...it aint worth shit. Maybe down the road in 6 months to a year you can mark to a market but until there IS a market....it still aint worth shit.
Months and months of preparing this measure and all they could come with was "uh, like give us 700 billion smakeroonies and we'll, like, you know, do stuff with it. But, like, no do-overs and no, like, harshing on us if we fuck up!"
Some time ago there was a post here about buying houses for $10k-$20k in Atlanta--cheaper than a car, as I recall.
As it turns out these houses were appraised at $100k-$150k for both mortgage and tax purposes. (One day, one of the local TV stations ran a story about the city's tax collections being $20 million short. Guess what? It was due to the appraisals on this same category of houses that weren't worth anywhere near their claimed value that was at the root of the problem, but the story never got that far.)
I think this is the kind of "asset" that Bernanke and Paulson are proposing that we pay "full value" for.
In other words, buy the pig in a poke. But a pig in a poke is still a pig, even if it has lipstick on it.
SRC: replace "bank failure" with "credit contraction" and I think that you have nailed BB's concerns
I think I recall his exact words being "cost of credit intermediation" (CCI, I found some of his old papers on google scholar). That is, the major contribution of banks to the economy was that they kept the CCI low, and when banks failed we lost all the expertise which they had in pricing and distributing credit risk, resulting in a spike in the CCI, a credit contraction and hence the Great Depression.
This of course has always made me wonder--haven't Tanta's posts over the past year essentially been an education in how exquisitely shabby the big banks had gotten when it came to evaluating and distributing credit risk? How they eliminated the "back office" people who really did the work of figuring out whether someone would pay back a loan, and instead substituted it with poor one-dimensional metrics like credit scores or, in the case of NINJA, nothing at all?
This is what makes me extremely skeptical that a bank bailout can actually serve Bernanke's intended purpose: keeping the CCI low.
I've wondered weather the USG could become the lender of first resort. I think it wouldn't work. One of the functions that banks perform (all those loan officers) is to evaluate and price the credit risk of would-be borrowers (small businesses, or home-buyers). I don't see how the USG can do this without hiring all the people who do it now. And to skip that step would be kind of what the mortgage originators have been doing in recent years.
Better to nationalize the banks and take over the risk pricing function that way. That might work (in my fevered imagination)
SRC
I've often wondered if some new innovation like prosper.com on a larger scale could be a real means of keeping CCI in the case that banks fail or become unwilling to lend. Probably of course much too small for the scale that Ben and Hank have in mind.
I live in Atl and can vouch for the 20-40K for a house. It is not worth the 150K loan because people with jobs and families do not want to live in those areas. You or your kids have a 50/50 shot at making it out alive by the time they reach 18. The dollar figures are correct. Most of those homes were investor purchases. The only way to value real estate in those types of markets is a rental income approach to value. That is sketchy because a lot of the rental data is private between tenant and landlord. Most of the homes are boarded up with no tenants anyway. Investor value driven markets are speculative in nature and can values can swing wildly with market sentiment. Right now....you can't give one away. If you want to buy dope....the market is ripe with buyers.
It's still interesting that GDP isn't negative and they're spending money like there's no tomorrow.
Does anyone have any memory how past recessions were treated?
I know Bush implemented the tax cuts in 2001 and Greenscum started his massive FFR cuts, but I don't recall anything other than that (maybe bailout money for the airlines after 9/11?).
I know this time is vastly different (with fraud, massive leverage), but I'm curious about similarities and differences.
A clue is that a self pronounced expert in this area doesn't even know how to do the pricing.
We'ze screwed.
risk ---- impacting discount rate
Oh, and FIRST AND Third. Nobody out.
I love this blog. CR, nice analysis again. Is there a way we can cut and paste these questions you posed to send directly to the representatives who will be hearing from Fiddlee-dee and Fiddlee-dum tomorrow?
I still think 75% is pretty generous. Considering that
A) The government will only get the most "at risk" mortgages, thus increasing the risk of default
B) California is looking at up to a 50% decline before hitting the rent vs. buy parity
C) Many houses defaulted on seem to be suffering a great deal of damage (everything from simple neglect to theft of appliances, even cabinets and plumbing)
Japan's Failure
In the 1990s, a Japanese government effort to buy troubled assets from banks to free up lending failed because sellers weren't willing to accept the prices offered, said L. William Seidman, a former chairman of the Federal Deposit Insurance Corp. He said that wasn't a problem he had as chairman of the Resolution Trust Corp. in the U.S., which sold off failed lenders' assets after the savings-and-loan crisis of the 1980s.
``If you're talking about institutions that haven't failed, then you have the question of whether they want to sell at a low price, particularly if that price depletes their capital,'' Seidman said in a telephone interview today.
In Japan, we did all kinds of things, trying to have a mediator who would set a price and other kinds of methods to get around that,'' he added.It never really got done, so it was not successful, but here we probably have a more urgent need for more institutions to do something.'
The new taxpayer mantra "Mark to Market". Anything less is a sellout.
If you think that imprudent loans are no longer being made, you should look at the auto market. The out-come will be no better there. Credit cards, durable goods (as in Best Buy) will all fall, each in it's own turn.
Every day on my way down to Wall Street I pass a homeless encampment. It's usually about 4 or 5 guys that spend their nights sleeping at a construction site. I live on the Westside of Manhattan. I usually hand them any change I have in my pockets, kind of a karma thing. I decided to have a chat with them this morning.
Turns out 2 of them are construction workers that sleep near/at the construction sites with the hope of finding some work the next day. The other two were doing random small jobs around the city (construction related) when times were good. They were recently homeless, about 2 months.
Things are getting bad, as these were not your "average" nyc homeless people (I'm a lifetime New Yorker). I've read in the papers that tent cities are popping up, but it's not until you see it with your own two eyes that you start to believe it.
Needless to say I've called both my Senators today to express my opposition for the Wall Street bailout (as proposed) and stressed that something must be done... Unfortunately, I don't know what a good solution would look like.
Regards,
dk
I suspect that Bernanke and Paulson don't believe in the long-term credit cycle but it sure looks like the marketplace does.
Rising interest rates for the next twenty years destroys a lot of that "value".
"One possible explanation is market failure based on information asymmetry."
Anther possibility is the stealth wealth transfer program (SWTP). GS or some other player buys podunk bank for pennies on the dollar and sells podunk's toxic assets to taxpayer at full price. Then some other player buys toxic asset back from taxpayer at pennies on the dollar. Wash. Rinse. Repeat.
this blog is getting crowded.
There must be commentator fatigue. I wasn't wired today and was shocked at the number of comments in previous posts.
the beta on the S&P 500 is lower than the beta on most stocks in the S&P 500
CR this sentence is a little confusing.
FWIW
....
This sure seems to sum up the achilles heel of MBS one fell swoop:
But if the assets are all impacted by one parameter - in this case future house prices - aggregating assets does not lower the risk.
I mean, could some of those Wall St. geniuses have dwelled for a moment on the fact that aggregation only reduces risk for uncorrelated events? Can we hire CR to singlehandedly replace Moody's?
I wish I could say that your analysis is complete but it is not. You have forgotten why this mess continued for so long. The re-bundling and sale of the same asset over and over again. The originating mortgage asset is now just a percentage of the cost that someone paid for an MBS.
This is why its a ponzi scheme. The original asset may never be underwater but the price that it would take to make the owner whole is greater than the original asset value.
It was like trading in a car you are underwater on. All is fine ass long as you keep doing it but at some point you end up wing 100,000 on an asset that is worth 6,000.
I thought the S&P 500 was "the market" against which "beta" is defined. In other words, I thought the beta of the S&P 500 was 1, by definition...
I agree with nades; you could probably just omit this sentence, CR.
Long time lurker, first time poster. I think this analysis oversimplifies these assets, as many MBS are held in tranches of varying seniority. So for the less senior securities, if there's a 20% loss severity (for example) in the overall pool, that tranche can be entirely worthless while a higher one up the chain could be valued more along the lines of Kling's hypothetical. So while the more senior ones could theoretically be held to maturity, the junior tranches are entirely worthless regardless of future housing price moves.
I assume the banks would be looking to get the worst of the worst off their books and onto the taxpayer's, so they'd likely dump these very assets and not the "super senior" ones which might actually have some value.
--
An interesting question is why do Bernanke and Paulson believe the Hold-to-Maturity price is higher than the current market price for MBS?
Because they are in the propaganda business AND they happen to be the agents of BFNYC.
They want BFNYC to get as high a price for their toxic waste as they can! They are just doing their job. They know that the American People are chumps.
There is a simple and cogent explanation to most of Americas problems.
Jas
Whether yes or whether no, whether reasoned or unreasoned, whether statisticaly correct or incorrect, NOTHING jsutifies giving the former head of a major broker-dealer a personal, unaccountable budget larger than that of the Pentagon.
Think about that. NOTHING justifies it. Not a recession, not a depression, not a meltdown. NOTHING.
This would make a great question for Bernanke tomorrow. Why does he believe the Hold-to-Maturity price is higher than the current market price?
Because he is Wile E. Coyote, super genius.
BTW, I would love to see someone make a picture of Wile E. Coyote flying an ACME helicopter, dropping dollars, and wearing a Princeton class ring.
Hold-to-Maturity price is the sucker price. Says a lot about BB. What a patriot.
Many banks are now finding out that a trashed home can have a value of less than zero. The cost of clean-up, taxes and fees can exceed any residule value
The risk premium curve on MBS is practically vertical, because of default uncertainty.
If Treasury can buy a majority position in a given issue, they can force modification of terms, which would let them reduce principal to the point where even the most timid investor would consider it investment grade.
The modified security could then be resold into a much more liquid market, which might well price it higher than today.
I'm not saying I love the plan. Only that it could conceivably work if done in this way. In short, CR is right about cramdowns.
Paulsen's and Bernanke's reason for needing this legislation kinda feels like my kid's reason for needing something. It always has an explanation of emergency and there is always some key piece of information lacking.
If all their real concern is liquidity in the credit markets, didn't they already take care of that when they created the auction facilities and opened up the discount window to just about everybody?
Instead of creating new legislation and a new taxpayer owned super SIV, all they have to do is get approval to increase the national debt, which they already do?
Something doesn't smell right.
Nice analysis CR
Ackerlof must be highly annoyed to know his lemons analogy was being used as a justification for paying above market prices for crap to bail out favoured parties. I think he was inspired to become an economist after his dad became unemployed in the Depression.
Naked King
Do you have a cite or link you can post for the article featuring Seidman? thanks
CR, nice analysis and good question.
1, What are the odds of it getting asked?
2, What are the odds of it getting answered?
I would bet the probability is the same.
because sellers weren't willing to accept the prices offered
I'm sorry but i work in a trading environment, the real estate business has their price conventions backwards:
when you are buying a price is the BID;
when selling the price is either the OFFERED or the ASK.
SR
The interesting thing the Main Post raises is not as the concluding paragraph suggests, "How finely can we split this hair "
To me, the more interesting question is - "Ben, do have enough time to secure the answer - given the 11 Trillion dollar problem you are trying to solve ?
I just got in since markets closed - why did the futures spike, anyone? Much appreciated.
How can any reasonable person thinks that house price declines can be stopped inspite of ongoing job losses, stagnant wages, HELOC issues, assesment frauds, mortgage frauds etc.
Drew writes
Excellent point and that was my next post.
You know these bastards are holding a bunch of the junior tranches. Because they where that greedy.
Persecuted Comrade Anonymouse
WWWD
What would Warren do?
....
Future House Prices ?
Econbrowser: Distressing Picture of the Day
Lower values ? You ain't seen nothing yet ...
Self-Persecuted Comrade Anymouse:
Bershire Hathaway to invest $5 Billion in GS
ades "the beta on the S&P 500 is lower than the beta on most stocks in the S&P 500"
median vs avg ?
The truly troubled securities that will be bought are probably not the original mortgages, right? They're probably the tranched-and-securitized ones. And probably there, even the worst of the worst (lowest in the payment food chain.) 75% or 100% doesn't seem terribly unlikely for whatever it is Treasury ends up with, conditional on the fact that the investor chose to sell it to Treasury.
exactly drew....which means you can guarantee overpaying as soon as this snowball from hell starts, as the first assets to go will be of zero value. Whether we ever get into it far enough to ever recovery those losses is a complete unknown, but I doubt they'll be a penny left over for the taxpayers to feel good about.
Ya Andrew, so you move up the food chain from there, and once you get to a point where the prices might start to approach something that would be a mark to market, ya know, something that isnt zero, the market may take over, and then the taxpayer will be loaded fully with toxins and nothing else.
ades --
What would Warren do?
Not buy Goldman Sachs common, that's for sure...
LOL!
Persecuted Comrade Anonymouse writes:
I just got in since markets closed - why did the futures spike, anyone? Much appreciated.
my guess - the PPT and hedge fund unwinding ...looks to be a massive hedge fund redemption ...
The FBI is investigating four major U.S. financial institutions whose collapse helped trigger a $700 billion bailout plan by the Bush administration.
Two law enforcement officials said the FBI is looking at potential fraud by mortgage finance giants Fannie Mae and Freddie Mac, Lehman Brothers Holdings Inc., and insurer American International Group Inc.
Goldman owns all these now, so why is FBI wasting cash???
I think CR has posted more than a few other analyses that explain why the MBS are far more complicated to price than his analysis here - default rate unpredictable, more than 36 different flavors in every MBS making each one as different as a snowflake, etc.
The point, I gather, was to use a very simplified analysis to get to the general question about why bernake things mark to maturity is higher than today's panic/fire/flood/hurrican/god-dammit-why-did-we-relect-Bush price.
And the point of that question, I think, is just to show what Bernake and Paulson admitted today: they don't have jack-all idea about how or why what they propose might work, yet they think no safeguard for the public (like an equity stake) needs to be considered.
And also to show what Krugman deduced: the paulson plan is to pay too much for the securities to recapitalize firms (or just to pay off cronies).
so it seems to me
Reading through the comments, one realizes that there are still a few folks who think the Treasury Dept will be buying mortgages.
They will NOT be buying mortgages which have value.
They will be buying the worst OTC derivatives which are WORTHLESS.
Or maybe we just got our bullish spring (light volume decline since Monday)... hopefully this will bring volume back and we can start pushing into Thursday's bar with quality of volume.
mmckinl: looks to be a massive hedge fund redemption ...
Wouldnt that cause more of an unwind and lower prices?
.....
"But if the assets are all impacted by one parameter - in this case future house prices - aggregating assets does not lower the risk."
This is why CDOs (and especially cdo^2 and 3) were so comical. Having your residual error terms multiply along with your leverage is a bad business model.
You guys are splitting hairs on your own bottoms.
They will be buying the worst OTC derivatives which are WORTHLESS.
~ comrade awgee
But thay have Credit Default Swaps from bankrupt counterparties ...
Are these two guys the smartest people in any room or are they talking down to us? I was for this before I became against this.
They will be buying the worst OTC derivatives which are WORTHLESS.
comrade awgee
If they start buying equity tranches i'm going to start a massive uproar.
........
"Having your residual error terms multiply along with your leverage is a bad business model."
Not if you can get your buddy hank to take them off you.
Look.
Look how steeped the culture is in the concept of interest rates that fall forever. Even on this board, few can conceive of a twenty-year period of rising interest rates.
Come on.
How much value do those mortgages have in an era of 15% mortgage rates?
ades writes:
mmckinl: looks to be a massive hedge fund redemption ...
Wouldnt that cause more of an unwind and lower prices?
````
They were shorting stocks and the dollar ...
"They will be buying the worst OTC derivatives which are WORTHLESS"
Well then, short the Fed.
Lets set the discussion aside and chault it up to: No Deflation at any cost.
Only recently did that correlation approach one (all house prices in all markets falling.) Previously (on ER) there were quite a few markets where prices were on the rise. That said, the bulk of the original mortgage $s securitized are localized (S Cal) for example, in markets that are under severe stress. So I dont think the other semi decent stuff can have a snowballs change in hell of balancing that out. And now, with credit markets tighter than a mule's sphinchter, no chance.
"But thay have Credit Default Swaps from bankrupt counterparties ..."
mmckinl
Well, that makes me feel better, as long as they "hold them to maturity".
Duplicate post I'm Sorry its just so funny!
Zina Saunders at Drawger
Premeditated rape--I don't trust them at all anymore--let's rescind F/F takeover and AIG--they're either delusional or corrupt politicians.
The argument I saw that the pricing can be different due to different demanded returns, and different funding costs.
The Treasury can fund assets at a lot lower rate than the private sector. That means that they can pay more for the same cash flows, and still break even.
Also, they have a lower return target. The Treasury would be happy with a 0% return on equity (breakeven); private equity/distressed debt buyers want 20+%.
If the assets have a long life span, the different discount rates makes a big difference in pricing.
ades writes:
They will be buying the worst OTC derivatives which are WORTHLESS.
comrade awgee
"If they start buying equity tranches i'm going to start a massive uproar."
Maybe I am one dumb bunny, but I assume the banks will sell the equity tranches first.
Paulson says:I fear
Like hell.
Give a critic an AK-47 and he couldnt get close to Paulson.
They do not do a Kennedy in Dallas anymore.
They fly in and out of global hotspots, like Baghdad, with impunity.
They do not fear JoeSixpack.
Joe fears a letter from the IRS.
This is funny.
bearly writes:
"They will be buying the worst OTC derivatives which are WORTHLESS"
"Well then, short the Fed."
It seems to me, going long gold is shorting the Fed.
Nemo and Nades, The point is you can usually grab a group of stocks - randomly pick 20 - and the beta of the group will almost always be lower than the beta of most of the individual stocks.
This is because the stocks aren't correlated. But in this case, if you aggregate MBS, this doesn't work - because they are correlated to one parameter - house prices.
BEst wishes.
"Whether yes or whether no, whether reasoned or unreasoned, whether statisticaly correct or incorrect, NOTHING jsutifies giving the former head of a major broker-dealer a personal, unaccountable budget larger than that of the Pentagon."
That's what struck me forcibly about this deal. It's a much larger figure than the DoD budget. As serious as it is, it's some kind of a monstrous joke.
--
Bernanke during Q&A in March 2007 on possible fall in home prices, The home prices for the US as a whole would not fall. The growth in prices will fall to 3-5%.
He knew what falling home prices would mean to the US economy and the markets and he was afraid to even take that probability into consideration.
Even after falling for 13 months in a row, the Case-Shiller Composite-10 is up 65% from 1995 after adjusting for inflation. Where would the MBS prices would be if the prices declined to 1995 inflation-adjusted levels?
He is lying about the prices for MBS because he wouldnt know what to do if the prices did fall to levels suggested by the markets.
In Bernanke and Paulson we are dealing with lairs who arr looking after the interests of BFNYC and not the American People.
The question is: What can the American People do about it?
A: Absolutely nothing. Nada. Null.
Political impotence of the American People is a well-kept secret.
Jas
Mel writes:
....they're either delusional or corrupt politicians.
Either that - or this really is our last shot at avoiding Armageddon. We are all in the same boat .... for now.
Forgot to mention the convexity of mortgage securities.
Mortgages are a heads I win, tails you lose investment. If long term interest rates go up I'll stay in my house and increase the duration of the mortgage. If they go down, I'll refinance into the lower rate.
Now with Wells Fargo Jumbo's going for 9% who's going to want to buy an existing mortgage with a 5.5% yield?
There are plenty of investors with long valuation horizons, such as private equity. If they are not buying these assets, that means they do not believe the price is fair.
Why would these assets be more valuable to the government than to private equity???
Similarly, would the government allow pension funds and insurance companies buy these assets for their portfolios?? They also have long term investment horizons.
Paying above mark-to-market still does not make sense.
As I've said before, bring out the bulldozers and start demolishing houses vacant for over 90 days. Gotta reduce supply..
Paulson doesn't actually have to believe that hold-till-maturity will yield more, he just needs to have something to say to explain why the US taxpayers should pay more than fire-sale prices. He has to have some reason for rejecting purchases of shit assets above current value.
Remember, HP is a 'no-calculator' guy. They haven't (presumably) seen the assets so how could they possibly analyze them enough to develop a model?
If Bush/Cheney told you to buy above current market to prevent loses by the banks, wouldn't you invent some reason to 'believe' all will be well, some day? He believed the problem was contained. He believed that his bazooka could stay in his pocket. He can believe in dinosaurs 6000 years ago. Belief is not analysis and it doesn't have to depend on those nasty things called facts.
go ahead - push it Mel - see what it gets you
cross-post from RGE - The unraveling of the Shadow Banking System moves to hedge funds as Schmalpha replaces Alpha
I suggest we concentrate more on the question of "what would really happen if there were no bailout".
Everyone around the country has to make the decision of whether to call Wall Street's bluff or not. It's time everyone put down, in the shortest form consistent with thoroughness, what your expectation of the impact of NO bailout would be. Let's express the impact in terms of economic sector, impact/severity, and duration.
Financial sector. No bailout means the holders of bad assets will have to bear most of the losses instead of spreading them across the other sectors. This means the existing players in the finance business are going to get wiped out, and will not be able to re-start quickly. This may be a good thing.
Transportation. Little impact. Financial products do not require much physical transport. Derivatives unwinding will cause some unexpected fluctuation in fuel costs. Transportation is a mature, consolidating industry; not much capital investment required.
Manufacturing. Some impact. Capital for new equipment will be harder to find, because the financial intermediaries that raise capital or lend it will be fewer, and they'll be much more cautious. This is an area that needs significant investment. $700B would make a good start if it were to be allocated to the manufacturing sector.
Agriculture. Moderate impact. Ag isn't investing that much capital right now - it's a mature industry.
Housing. Low impact. Correct: LOW. The housing industry isn't coming back until the middle class comes back. Bailout or no, the middle class isn't earning enough to re-start housing, and our fire-hose of debt from abroad is now shut down. That game is over.
Entertainment. Low impact. Movies are funded by rich people - Wall Street is not involved as an intermediary. Same for TV shows. New amusement parks are tied to middle-class income. Bailout not going to change that.
Professional services (non-financial). Little impact. U.S.' future economy depends to some degree on further specialization and development of this sector. Fin Service people can be re-directed here to good result. Capital requirements are not that great (offices and computers), but re-training costs are significant. Bailout has no effect on retraining, but saving the $700B and redirecting it here would be beneficial. Fin Services buildings and computer plant could be re-purposed.
So, my conclusion seems to be that Wall Street has not done much for the real economy over this past seven years, so it won't be missed much. The housing industry is flat on its back because middle-class people can't afford to buy a house, and debt is not longer provided by Asia and Europe (since the Ratings Fiasco, you see).
Therefore, I conclude that not bailing out Wall Street will only be detrimental to Wall Street in particular, and the Financial Sector in general. The financial sector has not been helpful lately, as evidenced by their demands that we bail them out.
Therefore, I conclude that the bailout is unnecessary.
Please rebut/concur. If you've got numbers and charts (percent GDP by sector, annual capital investment by sector, etc.) you can reference, please do.\t
Hide reply Reply to this comment By OuterBeltway\t on 2008-09-23 17:36:09
Paulson to the Senate:--Open wide.
BB to the Senate:--It won't hurt too much.
Sheeeit!!
Mel and Popeye
It could be all three: they are delusional, they are corrupt, and this could be our last shot at avoiding armageddon.
now that is some scary shit.
YouTube - Stop the Bailouts
It's a bifurcating system: one road is bumpy and the other leads to outright ruin. It's impossible to set a price right now because the outcomes are too divergent and the probabilities unknown.
If some kind of bailout is done and it works, the market recovers sooner and the assets might retain some value.
If everything goes to hell in a handbasket, the paper assets are only valuable as toilet paper and fire-starters.
Current market prices have to be somewehere in-between.
If an intervention can pick up assets below the "best-case" price, and then government can somehow manipulate things to get the best-case outcome, it's a win all around.
But it's damn unlikely. Government intervention will have huge unforeseen consequences. The first of which is that sellers won't offer recent market prices because they'd rather hold for the best-case outcome...
go ahead Mel - push it - you won't like the results - but you may make a short term profit.
This is because the stocks aren't correlated. But in this case, if you aggregate MBS, this doesn't work - because they are correlated to one parameter - house prices.
Calculated Risk
The Future of House Prices
Econbrowser: Distressing Picture of the Day
yes ... massive loan amounts bigger than sub prime await to be defaulted ...
CR - With respect I'm not sure.
The fact remains that a good deal sit offshore and therefore the precieved value is in the immediate exchange for USDs. The time lines are fixed (unless you unload) on the paper and therefore there is not a correlation. But rather a series of fixed points based on currency assumptions.
CR - Beta is not a good example since it is corelation to the systematic risk only. Total volatility is a better one.
YouTube - Stop the Bailouts
NOW
Calculated Risk --
This is because the stocks aren't correlated. But in this case, if you aggregate MBS, this doesn't work - because they are correlated to one parameter - house prices.
But I thought all housing markets were local...
Do not stop the flow of bile to your elected officials:
Congress.org - Get informed, get involved -
all you need is a zip code and an attitude -- share it with the folks whose salaries you pay.
dk, great observation/discussion to share. I keep noticing more homeless people in my Manhattan work neighborhood too. It's getting colder by the day.
"As I've said before, bring out the bulldozers and start demolishing houses vacant for over 90 days. Gotta reduce supply.."
Housing could turn around tomorrow and these assets would still have no value. The over inflated the prices then took out insurance on the asset which was also resold and inflated.
The problems in pricing have nothing to do with future home prices the problem is that we are on the tail end of a ponzi scheme.
CR, great analysis, but IMO most of it is beside the point.
The heart of the problem is, and will always be, something you discounted and even Thoma relegated to a parenthetical phrase:
(a standard lemons problem)
I don't think GS or JPM knows what a given CDO is worth.
I don't think the Treasury knows, either.
But what I'm damn sure of is that the people who are holding the security have a better notion of its relative value vs. the rest of their portfolio than the gub'mint ever can, or will.
And that means that when the clarion call goes out, these guys and everyone else are going to sell the worst and most undeserving-of-the-rating pieces of garbage in their collections and count on the fact that the Treasury won't have time to pull each one apart. Even if they don't know what it's worth to 3 decimal places, they certainly have a vague notion of whether it's better or worse than most, some, or very few of the hundreds of other nearly-identical tranches they own.
They'll keep the - well, not the 'cream of the crop', perhaps, more like 'the parts of the pig that don't go into hot dogs' - et voila ... banks get the cash, Hank and we the taxpayers get the trash. Almost by definition.
Anyone want to guess what this might be about?
WASHINGTON (AP) Sources say FBI investigating Fannie Mae, Freddie Mac, Lehman Brothers and AIG. (APNEWSALERT) (7:02 PM 9/23/08)
Mook please. These are US compnaies who pride themselves of fairness and honesty.
But I thought all housing markets were local...
Nemo
~~~~
the paper for houses on Mars is just fine ...
"Or some other reason?"
Hummm, Ya think, maybe?
Bernie Sande33rs is making Larry Kudlow a chump.
Kudlow says, 'every twenty or thirty or fifty years we need this type of government intervention.'
Sanders is now convinced.
My take: suck one dick and they call you a homosexual.
Right.
Just finished reading "The Great Crash 1929." So much of it rings just as true today.
Basically my summation is 'nothing has changed.'Bernake may have written his thesis on this same event but the script is still the same. I think we at March 1929.
Some people don't remember but people actually starved to death during the depression. We are talking about a biblical type event.
Reading the book it seems we have the same caliber of idiots running things also.
Osama Bin Ladin must be sitting in his cave and banging his head against the wall. He just realized he could have done ten times the damage to the USA if he just got a job at Goldman Sachs.
Nova: genau!
OT, FBI is investigating F & F & AIG.
Probably, just for show.
The Associated Press
How bad would Armageddon really be? Who would be our leader--Nixon or Bush II?
I just watched Senator Bernie Sanders rip Kudlow a new one. Someone please put this on youtube.
Also check out Sanders site where he has an open pretest to the bailout.
Home: U.S. Senator Bernie Sanders (Vermont)
CR,
SIMPLE IDEA!!!
How about this? How about we include a provision that the managers of the tax payer funds will be INCENTIVIZED to make a profit on the assets they buy. Simple idea - turn Wall Street's greed on itself?
Anyone?
I am not going to pretend that I will not be hurt, because what is happening!!!
My only prayer is that I get a glancing blow as opposed to a straight on hit by the on coming train!!!
I suspect that that you are now watching history in the making, is that the accumulation of 20 years of debt coming due.
Our creditors want their money back, and maybe they will get 10%(god, I do not know) on the dollar.. We do not have the money, unless we declare bankruptcy.
The Elites and their tools (dems and reps) do not want to admit this!!! Besides, there is a few more coins in your pocket that they want to squeeze out of you before they move on.
jopho
rc - interesting how GS is not mentioned in anything yet they were a major player...
tin foil hat off
Comrade Volker the Viking | 09.23.08 - 7:41 pm | #
Danke, Nordma
The difference between hold-to-maturity and market price is easy to explain:
Wachovia owns $122B of Option ARMs. On their balance sheet, they hold them at a net price of $96-00.
Super-Senior bonds with 40% credit enhancement off Option ARM collateral are offered in block size @ $60-00.
Which do I believe more? Methinks "market price" is a better indication of value...
sorry for the typos
Sanders is not convinced.
My take remains unchanged.
Nova writes:
Just finished reading "The Great Crash 1929."
Some people don't remember but people actually starved to death during the depression.
THINK !!!!
rc writes:
OT, FBI is investigating F & F & AIG.
Probably, just for show.
this situation cries out for scapegoats ...
bread and circus ...
Bernanke warned, in his famous helicopter speech, that he would overpay for assets.
This is the helicopter phase.
But he needs congressional approval to borrow the helicopters and cash, and he only intends to fly down wall street dropping it.
Wall Street says they have no bread.
If we tell them to eat cake, will they lop off our heads?
bread and circus? or breadlines circling?
I prefer the first.
mmckinl writes:
rc writes:
OT, FBI is investigating F & F & AIG.
Probably, just for show.
this situation cries out for scapegoats ...
Unusual. The FBI usually doesnt go public inless an investigation is nearing the end.
in the helicopter spiel did bernake say he would just give the money to GS? Or did he suggest some greater dispersion?
joe shmoe writes:
bread and circus? or breadlines circling?
I prefer the first.
~~~~~~~~~~
so do mericans . that's why we've got the pols we do ...
If the monthly housing data (sales, inventory, prices, starts) continues to deteriorate - and at a more rapid pace than consensus expects - will that still have such a large impact on financial markets, as almost everything can be sent to the Treasury? Do you think traders will care if housing sales fell by 10% more than expectations? This is an odd time, even if you're an non-participant.
mmckinl. Thanks, I forgot they were short.
CR thanks, understood.
Awgee the equity tranche is the worst one and first to take losses. It's the leftover from creating MBS's.
FRONT PAGE CNN
FBI INVESTIGATING FANNIE, FREDDIE, LEHMAN, and AIG FOR POSSIBLE MORTGAGE FRAUD
CR wrote: "First, this analysis assumes 100% loss severity in the event of default. If there is a 50% chance of default, half the time the mortgage will be worth $110K discounted back to the present. But if the borrower defaults, the value will not be zero since there is a recovery value on most mortgages."
Well, he was just using a mortgage as an example, however I think many of the derivative securities have a zero value in the event of default (such as one secured by a tranche that takes the hit on the first 20% loss, etc). Nitpicking the logic won't get you very far. Plug another number in if zero doesn't tickle your bean.
Unusual. The FBI usually doesnt go public inless an investigation is nearing the end.
~ Nova
What's usual about what is happening ... ?
The other view of course, is that the market has priced this toxic waste accurately and it is worthless. Does the titan of capitalism think that the market is wrong? Are we all Socialists now?
All this reminds me of mating elephants, with one exception.
Most is preceded by a great deal of trumpeting and posturing.
All the action occurs at a very high level.
It takes two years to see the results.
Exception: we'll see the results in less than two years.
OT, but I couldn't see this get buried in an aging thread. Props be to poster Mook.
Hoocoodanode?
(to the tune of Whitney Houstons How Will I Know?)
For five years we loaned, faster than we dreamed of
Option ARMs, subprime, 10 times income and above (mm-hmm),
NINJA loans, Alt-A, couldnt write em fast enough,
And were safe, cause really, housing prices just go up
Ooh, sales would slow (dont stop believin) hoocoodanode?
Resets would grow (never in this region) hoocoodanode?
Hoocoodanode house prices could decrease?
The loans were made with easy money,
Securitized and dumped on the Street,
Wed make a bid, but who knows about these things?
Hoocoodanode you couldnt trust Moodys?
"These CDOs? Why, theyre triple-A (risk-free)!"
Blowing a hole in our balance sheet
We say its strong, check back in a week
Dont blame me for chasing a little bit of yield now (uh-huh),
'Cause well soon be taking, another quarter of writedowns
Ooh, tell me, credit would slow (its just a feeling) hoocoodanode?
Defaults would grow (it must be the season) hoocoodanode?
Hoocoodanode our assets were fuzzy?
We leveraged up with easy money,
We passed the buck and raked in the fees,
It modeled great, but who knows about these things?
Hoocoodanode all our counterparties?
"Too big to fail" is our new cry (trés chic)
Lets ask the Fed for more Treasuries
Then take this debt, and play hide-and-seek
Ben Bernanke will you bail us out (mm-hmm),
Hey Henry (ooh) b-b-bail us out,
Fred and Fannie gotta bail em out,
Hey, hoocoodanode? Hoocoodanode? (Who-o-o?)
Hoocoodanode bank failures would increase?
Theres two or three new victims each week,
Call in the troops from FDIC,
We could be next, 'cause who knows about these things?
Hoocoodanode the markets could all freeze?
Can't sell our loans, 'cause theyre too far (off peak)
So here they sit on our balance sheet,
A big black swan, swimming up Shit Creek ...
Hoocoodanode? (We couldnt know) Hoocoodanode?
Hoocoodanode? (It isn't fair) Hoocoodanode?
Hoocoodanode? (The quants were stumped) Hoocoodanode?
Hey, hoocoodanode? ... (fade out)
Mook | 09.23.08 - 7:13 pm | #
Just got back from Lefty's with some inflation hedges, liquid qold in small bottles :>)
If Bernake thinks he knows what to do, based on what was done in 1929, which I guess is the reverse.
I am not sure if he included how much the current system can be influenced by players outside of it.
The British, under Churchill, may have been big. Yet they were never equal to what weight the Mid-East and Asia can pull.
You want a baby - or do you want a couple of more sips of bathwater............ Just askin' for those of you who seem intent on throwing both out.
Off topic but about CDS, which I consider to be front and center if evloving this sitiation from a run of the mill recession and correction into a hair-on-fire survivalist scenario-
I was encouraged to see Cox call for immediate regulation of CDS today.
We need:
A central clearinghouse for all trades
Transparent pricing and valuation
Further standardization of the contracts
Mandatory electronic trade matching (not the half hearted DTCC effort today)
Most importantly- you should be required to own the underlying for which you buy protection- analagous to obtaining a borrow on stock you want to short.
If I could buy an insurance contract for $50 bucks a year on my neighbor's $500K house, all I need is a book of matches to get myself a big payday.
We need this regulation immediately.
re: the FBI Investigation: "Officials say the new inquiries brings the number of corporate lenders under investigation over the last year to 26."
We should be hearing something about Mr. Mozillo soon - they have had quite a while to work on him. I wonder if he'll turn state's evidence?
Circuses indeed - first the perp walks, then the show trials... plenty of amusement. Maybe I should buy up some ad time on a few news programs and resell it in a few months - is that still allowed?
Citizen Popeye:
There is no baby, there is no bathwater.
"Citizen Popeye writes:
You want a baby - or do you want a couple of more sips of bathwater............ Just askin' for those of you who seem intent on throwing both out."
Actually we're going to put it all in a VitaMix, call it nutrition, and make the poors drink it. It's the new staple of the ownership society.
Comrade DialM
Excellent points ... the lower traunches will never be repaid as the higher traunches get paid first.
This doesn't work if your CDS position counterparty is bellly up.
What do held-to-maturity and available-for-sale mean?
Accounting standards require a Company to classify its investment in debt (bonds)
and equity (stocks) securities into one of three categories when they are purchased:
(1) held-to-maturity, (2) trading, or (3) available-for-sale. This classification is
based on the Companys intended use of that security and the classification dictates
the accounting treatment.
♦ Held to maturity debt securities that the company has the positive intent and
ability to hold to maturity are classified as held-to-maturity securities and are
reported at amortized cost. The impact of temporary fluctuations in fair value
of the debt securities is not reflected in the Companys financial statements.
Since equity securities have no maturity date, they cannot be classified as held-
to-maturity.
♦ Trading debt and equity securities that are bought and sold principally for the
purpose of selling them in the near term are classified as trading securities and
are reported in the financial statements at fair value. Changes in the fair value
from period to period are reported as a component of net income.
♦ Available-for-sale debt and equity securities not classified either as held-to-
maturity or trading are considered available-for-sale and are reported at fair
value. Changes in the fair value from period to period are not reported as a
component of net income but are charged or credited directly to equity.
mmckinl writes:
Comrade DialM
Excellent points ... the lower traunches will never be repaid as the higher traunches get paid first.
This doesn't work if your CDS position counterparty is bellly up.
Genau!
I've said my peace - you guys have at it.
Comrade Bagholders,
I don't give a rat's ass about any of this crud. It's indefensible. They made their bets, they took their wins. The table got cold they continued to play. EF EM! Eat that turd you stupid ass hats.
Nostrovia,
CR, your cost of capital argument can be extended: what if they issue tax exempt bonds backed by their newly-purchased toxic waste portfolio, and use only the proceeds from these bonds to pay for the acquisition of the toxic waste? We would all get a vote on how to value the CESSpool (Calculated Earnings Stream Securities pool) in the form of a bond auction.
Citizen Popeye:
Peace, I'm watching wheel of fortune.
Out here.
Held to maturity HAS never had any adjustments to the recent price fluctuations in the market.
Even though I would call a uni-directional move a fluctuation.
It is highest recorded price without a doubt.
You are being reemed.
As I recall LTCM blew up when it over relied on mathmatical models for value. But value is a subjective thing not easily quantified. Small pox vaccine was worth more than gold when there was small pox around. Now that there isn't you can't give it away. Hold to maturity may not be subject to quite the same risk as technological obsolescent it isn't immune to unforeseen factors as well.
Held to maturity = LEVEL 4!
They are trying to take it to the next level.
I wonder what they will use for an inflation number when they calculate present value of those securities: the government numbers or the shadowstats numbers?
Comrade Volker the Viking writes:
Citizen Popeye:
Peace, I'm watching wheel of fortune.
Ok, I'm not dropping out if you address me directly.
Comrade Volker,
You can pick your friends or you can pick your nose. But, you can't pick your friend's nose.
Held to maturity = LEVEL 4!
They are trying to take it to the next level.
~Anonymous
ROTFLMAO
Ben's answer:
Home prices always go up!
Held to maturity is not a bailout, it's a gift.
"They are trying to take it to the next level."
4 on a scale of ten? Or does this disaster go to 11?
Citizen Bagholder Popey,
The baby got parted out. Nothing there but dirty bath water.
Nostrovia,
Mel,
You makes your choices and you get your results. You wanna sink the boat ? hmmmmm, maybe I don't want you in my life raft afterall.
hah - watching the replay of today's senate hearings on CSPAN 3 right now.
My wife, who has heard me rant on all this, is watching Paulson and Bernanke acting like muppets and her reaction is something akin to "what the f-- is this bulls---!!!"
A lot of folks seam to be assuming the the plan is mismanaged.
FT had an article several months ago explaining why Markit prices on "AAA" securities were a lowball estimate of value.(Natural sellers overwhelm natural buyers of protection)
My guess is the purchase of "AAA" securities that are trading at 60 for 80 by the government would help the economy and ultimately cost nothing.
All of the negative reaction reminds me of the Mexican Bailout which was unpopular and heavily cricitised but helped the economy and was profitable.
breaking news.
FBI investigating all previously bailed out institutions, including executives.
Breaking news, FBI Investigating Potential Fraud by Fannie Mae, Freddie Mac, Lehman, AIG:
404 - Resource not found
Updates by the minute on all major news sites.
Popeye: Pick this.
It's spelled vicTim.
<a href="http://www.youtube.com/watch?v=7h15xIoVwWw>Bernanke and Paulson as muppets?
They didn't get into any of this which they should have since it is conceptual.
It seems reasonable to apply at least reversion to the mean in terms of historic RE valuation metrics. Are many of the current accounting marks incorporating this approach?
I suspect a popular discount in the real market for this stuff is the complexity discount. I suspect the buyers perform rough calculations and apply this complexity discount. It seems the government should do the same.
I hope the Anthrax investigators aren't on it.
vicjim
AAA = shit with a credit default swap ...
a cds that is now backed by an insolvent counterpoarty ...
Mel,
You makes your choices and you get your results. You wanna sink the boat ? hmmmmm, maybe I don't want you in my life raft afterall.
Citizen Popeye | 09.23.08 - 7:58 pm | #
I come with spinach. I don't think this plan will work--neither do the salesmen. We need a plan done by those not involved with the causation.
Comrade Volker,
Stop it.... don't address me directly, and I will just listen.
Citizen Popeye: You stop it.
Comrade Bagholder sm_landlord,
"4 on a scale of ten? Or does this disaster go to 11?"
Oh this one goes to 11. And that's not level 4.
If this shite is so friggin' tasty, why are we even having this discussion. It's a nothing burger. So this must not be the case with BS Bernutty and Hanky running around throwing out 3 page legislation packages for $700B.
No friggin' way. Something's afoot.
Remember Bernutty said they want to buy seconds...seconds!!!!! Sorry those ain't ever gonna be worth shite.
Is good ol' conservative lender witha shit pile of seconds WF gasping for air?
Nostrovia,
My wife this morning finally finally figured out that it would currently be economically advantageous to walk away from our Phoenician 2005 edition debtburg.
Man is she pissed. Our 20% down, dust.
She wants her bailout, Paulson, and she wants it now!
Put that in your GS retirement fund!
Loss severity if we walked away- 100% on the Heloc, around 25% on the first- with a 20% down purchase!!!
In a "stable area" of Phoenix, not an exurb.
Million four foreclosure is right up around the corner from me, overlooking the preserve with a broken window right behind the custom ironwork massive front doors, and dead grass. Now zillowing at 800k and going lower by the day.
THE ONLY WAY WE GET HIGHER REAL ESTATE PRICES IS FROM MUCH HIGHER WAGES, OTHERWISE THE FED IS PUSHING ON A STRING AND COLLAPSE IS UNAVOIDABLE!
Can we haz bailoutz, pleasez?
Someday this war's gonna end...
Mel,
My comment wasn't personal. I was suggesting likely results. I hold to my original values.
Citizen Popeye writes:
Mel,
My comment wasn't personal. I was suggesting likely results. I hold to my original values.
But I bought the spinach just for you!
Ok, been out for a bite to eat. What did I miss since 2 hours ago?
Don't you people ever eat? LOL
vicjim, the "AAA" rating is the original rating on those, not the current rating. The losses have already extended far deeper into the tranches than originally anticipated, and the counterparty risk of those who added credit enhancement is much higher than originally perceived (and priced).
Commissar,
Many "real economy" firms use borrowed money to fund operations, pay employees, "build"/purchase inventory, etc. This money comes from the credit markets, such as borrowings from commercial banks, or sale of commerical paper to investors (money funds, for example).
My understanding is that the banks are obliged to reduce their loans outstanding as their regulatory capital declines, and their capital losses have also made them more risk-averse and reluctant to lend into the real economy. This is the credit freeze that is terrifying HP/BB and presumably also some in Congress.
It isn't simply banks that are leveraged. Many real economy companies are also leveraged --- dependent on borrowed working capital to operate. For example, Ag producers use borrowed money to finance seed, fertilizer and fuel. Their net profit after a year's operation is not sufficient to fund the next year's operations (and their multi-year retained earnings in many instances are negative, I suspect--- borrowings
can fund losses as well as operations). So failure to unfreeze the credit markets is likely (certain?) to result in a contraction in the real economy. And that could become self-perpetuating, as reduced consumer expenditure (due to layoffs) results in reduced demand for goods/services and more layoffs, a death spiral and Great Depression II.
So this is scary stuff. Congress must do something, but it needs to get it right to minimize the negative unintended consequences. If HP spends too much fixing the banks, he might, in a really awful scenario, un-nerve international lenders, collapse the dollar, explode Treasury's cost of borrowing, and provoke a default on US sovereign debt.
heh
The President is pissed...he has sent the Vice President to "call on" reluctant members of the Republican Party....
From the FT front page:
What the vice president and others will emphasise is that this is absolutely necessary; in no way should it signal any abandonment of the belief that our markets work and our free market system works, said Tony Fratto, White House spokesman.
He added that it was unthinkable that Congress would fail to agree the measure this week and that the leadership on both sides had given assurances to that effect.
Is this a plan:
Inflate, Baby, Inflate!
House prices go up; value of "toxic" paper goes up.
I once heard, "Inflation will make you whole."
So if Bernanke is worried about "punitive measures" (i.e. executive compensation limits) as disincentive for firms to take advantage of the bailout, can't this be solved by applying these "punitive measures" industry wide (to the entire short sale list)?
Comrade Bagholders,
They want to hold to maturity. Then what. When women hold things to maturity, the household budget changes a bit.
Just sayin'
Nostrovia,
--
I thought that price discovery was the most important part of the markets. Did I think wrong?
Maybe, we should ask Fed Chairman and Treas Sec to determine the prices of complex instruments. Who can possess more knowledge?
Let us become good Communists rather than bad capitalists that we have become.
Jas
Some foreshadowing:
Could Tremors in the Subprime Mortgage Market Be the First Signs of an Earthquake?
Published: February 21, 2007 in Knowledge@Wharton
Could Tremors in the Subprime Mortgage Market Be the First Signs of an Earthquake? - Knowledge@Wharton
Ok folks, The show is over, move along!
Dow and S&P go down 15%, houses bob down on an elastic string in places and drop another 15% and then taxpayers get burned, and growth slows for 5 years, then things recover slow. Inflation will keep cost of living uncomfortable and all the crooks go free. Show is over, move along!
Is SRS tanking AH because of Buffet's investment in Goldman?
Could Paulson have had some good intentions? Suppose he would have used the extraordinary powers he requested to force a netting of the CDSs?
i fail to see why so many smart people are uncertain about future house prices. seems that they will need to fall until they are at or near historic relationships with incomes? any ideas why someone would believe something else, other then perhapse wishfull thinking.
A couple of points:
Thus, Bernanke is using an academic argument not a practical argument. Unless you have an actual use for a Mortgage Security, say a pension fund who is trying to fund a certain set of liabilities, to talk about "held to maturity" pricing is nonsense as the government is not planing to hold the assets.
To use the corn example, a farmer and food producer are commerical users of corn. They have a use for the corn and everyone else in the market is a speculator.
me: with respect, we don't need history lessons
If this bailout deal fails, this will be recorded as the internet revolution.
We, collectively, even Popeye, will be regarded as minute men.
Comrade SRC,
"Congress must do something, but it needs to get it right to minimize the negative unintended consequences."
Get it right...
BWAHAHAHAAHAHHAHAHHAAHA!
Damn, you got more of those? Blind squirrels find more acorns than these asshats getting it right and avoid unitended consequences.
Hell I suspect that in most legislation they are actually aiming at achieving the WORST unintended circumstances.
BWAHAHAAHAHAAAHHAAHA!
Nostrovia,
Mish posted that Sen Shelby is the roadblock in Bush & Paulson's all out push to ram this bailout up our collective asses.
PLEASE contact him and the other "fence sitters". (Stolen from Mish)
Fax Title "Senator Shelby, Block This Bill"
Senator Shelby
You are correct when you say the crisis was created by "sloppy underwriting and reckless disregard for the risks they were creating, taking, or passing on to others."
Most importantly you are correct when you state "There are no credible assurances that this plan will work. We could very well spend $700 billion and not resolve the crisis."
Senator, the odds of failure are 100%. The Paulson plan will not create any jobs or help homeowners pay their bills. Instead it diverts $700 billion of taxpayer funds to failed banks that took excessive risks. The sheer size of the bailout will cause interest rates to rise, further adding to taxpayer woes.
Robbing taxpayers to pay failed banks cannot possibly work!
Printing money and giving it away cannot work either. If it did work, Zimbabwe would be the most prosperous nation in the world.
Senator Shelby, our prayers are with you that you have the courage to stand up for what you know you must do: Block This Bill.
I ask that you approach fellow Senators Jim Bunning, Chuck Grassley, and Jim DeMint in hope that one or more will have the courage to join you to in preventing what is still a preventable disaster.
Your Name
Your Phone Number
Fax For Bunning, Grassley, DeMint, Ensign, Reid
Dear Senator
Earlier today I asked Senator Richard Shelby to have the courage to stand alone, if necessary, block the Paulson proposal.
Senator Shelby is correct when he states "There are no credible assurances that this plan will work. We could very well spend $700 billion and not resolve the crisis."
Senator, the odds of failure are 100%. The Paulson plan will not create any jobs or help homeowners pay their bills. Instead it diverts $700 billion of taxpayer funds to failed banks that took excessive risks. The sheer size of the bailout will cause interest rates to rise, further adding to taxpayer woes.
Robbing taxpayers to pay failed banks cannot possibly work!
Printing money and giving it away cannot work either. If it did work, Zimbabwe would be the most prosperous nation in the world.
Senator, our prayers are with you that you have the courage to stand up with Senator Shelby and do what you know you must do: Block This Bill.
Your Name
Your Phone Number
Sen. Richard Shelby (R) 202-224-3416 or 202-224-5137 (both seem to work, I fax both)
Sen. John Ensign (R) 202-228-2193
Jim DeMint (R) 202-228-5143
Sen. Jim Bunning (R) 202-228-1373
Sen. Chuck Grassley (R) 202-224-6020
Sen. Harry Reid (D) 202-224-7327
or not
SRC
Bank Holiday ...
out with the bad , recap the good ...
let the stock and bond holders take the hit ... maybe they will be for more reg next time ...
Comrade Volker the Viking... stop trying to pick my nose.
Comrade Misean: It was a response/parody comment of one above it.
I do not expect any of these dudes to fix anything. But my reasons are different than most. I don't believe they are stupid or incompetent; I think their motivations are different than what we are taught to expect.
My great grandfather went to his bank and withdrew all his money just prior to Roosevelt's bank holiday. He loudly proclaimed that anyone in their right minds would do the same. God loves a rebel.
Bid also depends very heavily on cost of capital, or your investors required IRR. The distressed buyers of broken development deals are pricing to a 30% IRR due to the all equity nature of deals these days (no debt available).
I guess Paulson's cost of capital is the risk free rate, so there's another guarantee they will overpay!
Citizen Popeye writes:
Comrade Volker the Viking... stop trying to pick my nose.
pull your pants up ...
Citizen Popeye: C'mon, Popeye. Eat yer spinach.
Comrade Bagholders,
Paulson should have done an imitation of the Joker:
Do I look like a man with a plan?
Nostrovia,
Popeye is 'sticking to ...original principles.'
How's that going?
What good is the moniker Popeye if you're not going to tell people to "Blow me down?"
Comrade Volker the Viking
your grandad was lucky his bank was still solvent.
I can't say as much about this country ...
"Remember Bernutty said they want to buy seconds...seconds!!!!! Sorry those ain't ever gonna be worth shite."
Comrade Misean: I couldn't agree more. I am beginning to doubt that there is a single second loan on single family housing that is still above water. If there is, it won't be for much longer.
Comrade DialM
Agree with your comment. I was assuming the securities purchased would have substantial losses and the credit enhancement is questionable.
However, the supply/demand characteristics of the market, trading action of the Markit prices the last 5 months and a common sense look at real estate markets hints the purchases could be profitable.
Clearly they should avoid securities that were orignally poor quality or are dependent on bond insurance to be attractive.
Comrade Viking,
The comment you quoted had nothing to do with my market position - it was a personal comment.
Try again.
Comrade CSC,
Not pinging you...
Full test:
" SRC writes:
Commissar,
Many "real economy" firms use borrowed money to fund operations, pay employees, "build"/purchase inventory, etc. This money comes from the credit markets, such as borrowings from commercial banks, or sale of commerical paper to investors (money funds, for example).
My understanding is that the banks are obliged to reduce their loans outstanding as their regulatory capital declines, and their capital losses have also made them more risk-averse and reluctant to lend into the real economy. This is the credit freeze that is terrifying HP/BB and presumably also some in Congress.
It isn't simply banks that are leveraged. Many real economy companies are also leveraged --- dependent on borrowed working capital to operate. For example, Ag producers use borrowed money to finance seed, fertilizer and fuel. Their net profit after a year's operation is not sufficient to fund the next year's operations (and their multi-year retained earnings in many instances are negative, I suspect--- borrowings
can fund losses as well as operations). So failure to unfreeze the credit markets is likely (certain?) to result in a contraction in the real economy. And that could become self-perpetuating, as reduced consumer expenditure (due to layoffs) results in reduced demand for goods/services and more layoffs, a death spiral and Great Depression II.
So this is scary stuff. Congress must do something, but it needs to get it right to minimize the negative unintended consequences. If HP spends too much fixing the banks, he might, in a really awful scenario, un-nerve international lenders, collapse the dollar, explode Treasury's cost of borrowing, and provoke a default on US sovereign debt.
SRC | 09.23.08 - 8:06 pm | # "
Nostrovia,
"WASHINGTON -- The FBI is investigating four major U.S. financial institutions whose collapse helped trigger a $700 billion bailout plan by the Bush administration, The Associated Press has learned."
Washington Post
HMMM......
I had to work today, I missed a bunch. I did try to follow the hearing this morning. Was it my imagination or was Bernanke's lip quivering like he was going to cry early on? He looked scared to death...Which isn't comforting...
Also, J6P is fully awake. Every customer that came in the bar today was discussing the bailout and they are NOT happy campers...
mmckinl: Two years later a delegation came to him and asked him, no begged him to take his money and re-open the bank. He did, after extracting some concessions (some of which I benefited from fifty years later). Fuck 'em.
Citizen Popeye: just keep sticking to your original principles, we need people like you
Misean:
You do have a point there.
mmckinl:
That's a plan, and maybe that is the one that Congress will elect. I don't pretend to foresee the consequences. To quote Gandalf in LOTR/FOTR
"Nothing is certain. Not even the very wise can see all ends."
But I'm glad that Congress is debating this and not rolling over in terror. We may get a very bad plan, but it will probably not be as bad as what Paulson tried to ramrod through. That's all I mean by "getting it right." All roads may lead down from here, but some lead to a lower bottom than others.
Cheers
Comrade Kristina writes:
I had to work today, I missed a bunch. I did try to follow the hearing this morning. Was it my imagination or was Bernanke's lip quivering like he was going to cry early on? He looked scared to death...Which isn't comforting...
The tape will be played at his trial and he knows it ...
we may not get a 'plan' at all, hide and watch
Here was Lawler Econmic & Housing Consulting's take
Fed chairman Bernanke confirmed taxpayers worst fears that the Treasurys proposal would involve paying above-market prices from financial institutions. In wording that shocked market participants and academicians alike, chairman Bernanke said the following.
I believe that under the Treasury program, auctions and other mechanisms could be devised that will give the market good information on what the hold-to-maturity price is for a large class of mortgage-related assets. If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.
Now what the hell is a held-to-maturity price, and how in the world can an auction of other mechanism be devised that gives the market a good idea on hold-to-maturity prices since there is no such thing? Of course, everyone knew what he meant: held-to-maturity means above market. Why doesnt he just say that? Why dont he and Paulson just say that the Treasury plans to spend taxpayer dollars to purchase mortgage-related (and possibly other) assets from financial institutions at prices that exceed where the Treasury could then turn around and sell them? Why use such silly terms as hold to maturity prices? Or why not simply have the Treasury be the auctioneer coordinating the auction of distressed mortgage assets of financial institutions, but state that only hold-to-maturity investors can participate? Wont THIS tell us what a hold-to-maturity price really is? (Of course not!!!)
Bernanke went on further to say the following.
First, banks will have a basis for valuing those assets and will not have to use fire sale prices. Their capital will not be unreasonably marked down. Second, liquidity should begin to come back to these markets. Third, removal of these assets from balance sheets and better information on value should reduce uncertainty and allow the banks to attract new private capital. Fourth, credit markets should start to unfreeze. New credit will become available to support our economy. And fifth, taxpayers should own assets at prices close to the hold-to-maturity values, which minimizes their risk."
For those of you who did not see the testimony or read the transcripts, you are probably wondering if Im joking about what he said including that last sentence, which borders on the inane. After all, no educated economist would believe any of what he has purported to have said; rather, what he said is something you might expect from a banking trade group looking for a bailout. Yet sadly, he DID say this, even though there is no way he really believes it. As I believe Bagehot once said, panics produce prevarication from policymakers at precisely the point that precision should prevail.
Needless to say, this program is horrendous: it involves transferring wealth from taxpayers to financial institutions, with the hope that the benefit to financial institutions might eventually trickle down to taxpayers. An unambiguously better solution to deal with the current problem would be a second-round economic stimulus plan that would immediately send to all US taxpayers $5,000 which would be close to a $700 billion stimulus. The $5,000 would be to ALL taxpayers; NO add-ons to the bill would be allowed; and it would go into effect immediately. Sure, the impact would be inflationary good! But if government officials could convince the public that this action was a one-time stimulus (with the Fed purchasing the Treasury debt issued to fund the payments) in order to deal with this one-time problem, then its possible that thered be just a one-time jump in goods and services prices, and NOT an increase in the publics expectations for long-term inflation. This plan would (1) stem the decline in nominal home prices (but not necessarily the decline in the relative, or real, prices of homes); and (2) provide immediate funds to troubled home owners with mortgages. The benefits of such a plan would surely trickle up to financial institutions!!!
The tape will be played at his trial and he knows it ...
mmckinl | 09.23.08 - 8:20 pm | #
Now that would please me so long as Hank is right there with him.
Sorry but it seems like everything Bernanke does can be explained by this:
(i) Bank failures caused the Depression.
(ii) If we let banks fail, there will be a depression.
(iii) A depression must be avoided no matter what the cost.
(iv) Ergo, bank failures must be avoided no matter what the cost.
Comrade CSC,
So hows that video coming.
I think I'll write one too, after another 'tini. The bloods just starting boil good now.
Nostrovia,
"And fifth, taxpayers should own assets at prices close to the hold-to-maturity values, which minimizes their risk."
Ben Bernanke
more vaseline please !
Carlo,
replace "bank failure" with "credit contraction" and I think that you have nailed BB's concerns
Comrade Bagholder mmckinl,
"more vaseline please !"
Nyet! For that you get the super sized, spike, hoopajoop.
Nostrovia,
For a supposed great student of the GD Bernanke really seems clueless. Either that or he just thinks everyone else is stupid.
Stunning they are all attacking mark to market accounting. I mean really truly stunning. It's like a basic tenat of accounting.
Next we are going to say it is stupid to count expenses on the income statments of development stage companies. Why should they be forced to report losses before their business is really up and running - so silly you capitalists.
This is a battle for the future of the Country - period.
SR
I thought Bernanke meant the face value of the note. That is the principle plus accrued interest, which seems ridiculous. And, are they only talking about buying mortgages, or are the going to buy all the other junk? (Swaps, etc.) I suspect their value is zilch right now.
Mixed in with these packaged loans / bad assets, there are plenty of loans that have little or no value.
An example would be a 100% loan that was made on a condo in Southern California between 2004 and 2006. There are properties here that have lost a full 70% of their value - many properties in fact. An example would be a property that sold in 2005 for $330,000, that is now worth less than $100,000.
Also mixed in these loan packages are 20% 2nd mortgages, where an 80/20 loan was done, and the property value has fallen by 30% to 50% or more. That 2nd mortgage has zero value. So it doesn't matter if the loan is held to maturity or not - the property will be foreclosed on, if it hasn't been yet, and there will be little or nothing left for the bondholder.
Comrade Misean, $700 billion can capitalize one big ass bank or 10 Wells Fargo sized ones so the issue isn't necessarily Paulson or no credit.
The taxpayers could, for example, take Caterpillar commercial paper instead of WAMU loans as collateral for a loan. Even farmers could received loans direct from a USG lending agency. I may not like the it but it may be preferable to using bankrupt and incompetent banks to finance our economy and taking those banks worthless assets as collateral.
I appreciated dk's comment @7:08 about his walk to work in Manhattan...here's what I see in NW OR...we have a Koch brothers paper mill that is the largest employer in the county, so far it's hanging in there.
Lots of theft around here of scrap metal, from construction sites and even a local Lewis and Clark statue was stolen for scrap, eventually recovered but already cut up.
The local Ax-men are still in business, a lot is due the December 07 storm that left many downed trees, but they're not getting good prices because of the slow down in construction...speaking of which, a friend who's a builder said crews have been coming down from Portland and underpricing local crews because of the slowdown in Portland and suburbs. A number of Portland builders going BK and one guy holding auctions of empty developments to raise cash.
Just got home from work and saw this in the local paper on "Nickelsville" in South Seattle
Homeless start settling in fuchsia 'Nickelsville'
On Topic, but only for previous thread
How is $5B actually transferred from Buffetts to GS'? I've seen some big checks and wire transfers, but nothing over a billion, I'm quite sure. What are the mechanics of tranferring that much money? Just a push of a button and transfer from one account to another?
Comrade Misean: I'm still trying to choose a song. I just took delivery of some very fine smoke though, so I would reckon it'll git written tonight.
Dylan's 'Like a Rolling Stone' keeps coming to mind...just as it is.
We been playing this game for awhile
"Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out, and by the grace of the Eternal God, will rout you out. "
Andrew Jackson quotes:
Comrade Bagholder stock_regulator,
"For a supposed great student of the GD Bernanke really seems clueless."
Use the wrong analytical framework (Keynsianism) get a bad result. GIGO.
Austrian's have been screaming about the bubble since '03. The only solution is to let it burn out.
Bailout is just more fuel.
Nostrovia,
CR from Dodd plan
(3) ACQUISITION OF SECURITIZATION POOLS AND MORTGAGE LOANS.The Secretary shall, to the
12 extent practicable, acquire
13 (A) sufficient ownership or control of
14 pooled residential mortgage loans, or a
15 securitization vehicle for such loans so that the
16 Corporation has authority to modify the under-
17 lying residential mortgage loans, either directly
18 or through a designee; and
19 (B) whole residential mortgage loans, so
20 that the Corporation may use its authority to
21 modify the underlying residential mortgage
22 loans, either directly or through a designee.
If I understand this and I surely may be wrong, the idea here seems to be to gain control of the pool (I assume this would mean reuniting the several
levels of risk sold).
Then working within the pool and without try to heal the loan. This would also allow a fair market value to be established.
This seems fair which probably means it wont get done.
Also I understand that the earlier (pre-2006) loans are not in as bad shape as later ones. Perhaps working upp historically will allow the freeing of at least some assets
The economic establishment (all of them reactionaries/hypocrites) believe the Great Depression of the '30s was caused principally by two factors: 1)high tariffs imposed after the Depression began (self-severing argument); 2)the Federal Reserves' failure to flood insolvent banks with money. While the second point has merit (of course 1000s of banks failing destroying all of peoples' savings played a huge role in the Depression), these mainstream economists will never admit to the broad drop-off in aggregate demand caused by deflating asset prices and how flooding banks with money in no way resolves the consumer's propensity to take on new debt - hence why I'm a deflationist. They can "print" all they want, but unless it's literally handed out to consumers it won't stop the aggregate depressionary effects of collapsing asset prices.
"This would make a great question for Bernanke tomorrow. Why does he believe the Hold-to-Maturity price is higher than the current market price?"
His answer has something to do with auction dynamics. He alluded to that today.
Mark to Market? What the hell? Who cares when Professor Thoma goes to the market? Is this sorta like big brother watching some pinko lefty professor from Oregon?
unit472,
I've wondered weather the USG could become the lender of first resort. I think it wouldn't work. One of the functions that banks perform (all those loan officers) is to evaluate and price the credit risk of would-be borrowers (small businesses, or home-buyers). I don't see how the USG can do this without hiring all the people who do it now. And to skip that step would be kind of what the mortgage originators have been doing in recent years.
Better to nationalize the banks and take over the risk pricing function that way. That might work (in my fevered imagination)
It just hit me. The Chairman of the Federal Reserve testified before Congress today that he wants the US taxpayers to buy up to 700 billion of 'troubled' bonds, MBS,CDS,etc., not at mark-to-mark prices as required by the SEC and GAAP, but at prices above their current listed value on the books.
If ANYONE else tried to do that, they'd be indicted.
WHY is this man not fired or forced to resign tomorrow?
Comrade Bernanke is to be excused for his apparent confusion. The military have a phrase that applies to the current situation: "Fighting the last war."
Ben has done a heck uv a job preventing what happened in 1933. Way to go.
Comrade Bagholder unit472,
"Comrade Misean, $700 billion can capitalize one big ass bank or 10 Wells Fargo sized ones so the issue isn't necessarily Paulson or no credit.
The taxpayers could, for example, take Caterpillar commercial paper instead of WAMU loans as collateral for a loan. Even farmers could received loans direct from a USG lending agency. I may not like the it but it may be preferable to using bankrupt and incompetent banks to finance our economy and taking those banks worthless assets as collateral."
Yes...but ef 'em. This country's entire structure needs a credit diet. Get on the treadmill boys.
I'm in an extreme Super Colander Tin Foil Hat snit right now. I'm plugged into the twin 12v auto batteries right now.
Nostrovia,
YouTube -
You go girl. Get those bastards!
WHY is this man not fired or forced to resign tomorrow?
Comrade Baron Von Helmut III
more vaseline please ...
Misean,
Iz Mssr. Conjure Bag gnawing on the tender partz of our adversaries?
Cheney has been dismissive of Congress for nearly 8 years. It may come back to bite him in the ass.
from the Miami Herald...
n the House, Republican members met privately with Vice President Dick Cheney and White House Budget Director Jim Nussle in what was described as a tense session.
"People want to try to enjoy capitalism on the way up, socialism on the way down, and we know where that is headed," said Rep. Jeb Hensarling, R-Texas. "What we will end up with, I believe, is less freedom, less opportunity for the next generation."
Whether such anger will erupt into the kind of backbench rebellion that forced negotiators in the 1980s and 1990s to make changes in tax and budget deals remained unclear.
Do you guys think Rep. Marcy Kaptur might be Tanta?
I always thought she was a sexy Asian lady with mad tats.
Comrade Bagholder SRC,
"I think it wouldn't work. One of the functions that banks perform (all those loan officers) is to evaluate and price the credit risk of would-be borrowers (small businesses, or home-buyers)."
Man I ain't picking on you, but if those asshats had done their job we wouldn't BE HERE. Besides they computerized it to a large extent.
Not saying gov't would do a better job, but there ain't any talent out there to hire anyway.
Nostrovia,
Well I'm not exactly in favor of making the USG the lender of first resort because loans would be 'politicized'. Still the bogeyman that Paulson trots out of a total credit freeze if we don't buy the assets of the Wachovia and WAMU is designed to stampede the Congress into approving accepting bad debt from bad banks.
Surely there are some competent bankers out there with solvent banks who could take over the insolvent banks with government capital and operate them with sound lending practices.
Why do the boards and management of today's bad banks have to be saved? Lets find some new Stan O'Neils and Chuck Princes. They might be in a local bank in Amarillo or Lansing.
Misean,
Again, a good point. But I think that someone trying to price risk may still be better than no-one. Need to get the incentives right, of course. That's part of what went wrong in the mortgage-origination debacle.
Cheers
Commissar Rob Dawg,
One certainly hopes Conjure is getting a mouthful sir.
Nostrovia,
HTM pricing is about as sound an idea now as it was when the ARM's and 0 down loans were first accounted for as revenue on the books of the lenders.
If 10-15% of these loans are not paying now, how is transferring them from the books of WAMU, etc. to the USA changing the fact they are non-performing?
You know the guys selling their houses who haven't come down from their 2005-vintage prices because they "don't want to give their house away?" That's the "hold-to-maturity" price. Bernanke must think the taxpayers will get "instant equity."
Parody finalist: Waylon Jennings' "Are You Sure Hank Done It This Way?"
Y/N?
Bottomline is BB told the world today that he plans to pay a price higher than should be paid. That is what FINALLY woke everyone up.
I know all of us here knew that was his plan but it was still stunning that the dope actually verbalized it.
SR
SRC, I've been wondering the same thing. For revolving credit, usual course of business, sort of thing I think a direct loan set up could work short term. (6 months or less).
It would take affadavits, certification of credit history, usual revolving loans with a financial entity who has suddenly inexplicably withdrawn credit. Best case, the bank itself certifies that this is a usual customer with good credit in an ongoing relationship.
That seems more straightforward to me than buying troubled paper, esp if the goal is to keep employment up too. Of course it doesn't give prize money to GS and other pirates.
Comrade Bagholder SRC,
Yeah...we need to clone Tanta a few thousand times. That might work.
Nostrovia,
I might add that you could get a local bank CEO to run WAMU or Wachovia for a lot less than $20 million per year.
Action Bias indeed.
As an aside, I have not had electricity for 11 days in Houston since Hurricane Ike. Any chance the media might want to cover the 4th largest U.S. city being without power for half a month?
I already know of 3 small businesses which have gone OUT of business because they could not operate without electricity. Also, Houston just reported the largest decline in home sales EVER for the month of August.
I cannot imagine what is going to happen to September home sales when a very large portion of Houstonians are still without power. CRRRAAAAAASSSHHHHHHHH!
I think today turned a major bend in chopping this plan down to size. Both McCain and Obama shifted quite a bit today in the direction of Main Street.
Remember that Hank and Ben engineered Bear Stearns, Fannie & Freddie and AIG without asking Congress for bumpkus. They could still make a lot of waves without Congress, but not if they have their hands tied in knots.
You may start to see them pull away from this whole plan. It's not in their interest to rouse the rabble against Wall Street, get caught in a politial cross fire, or find themselves under Congress' microscope for two years.
This was a very bad day for their team, and they know it. But apparently, the markets don't know it yet.
Even if they pull back on the plan, they succeeded in giving markets more juice last week with the announcement. I'm convinced that was half their goal anyway.
Currently Smoking Cannabis,
"Parody finalist: Waylon Jennings' "Are You Sure Hank Done It This Way?"
Like it.
Take a look at this one:
YouTube - Family Tradition
Nostrovia
FYI, I tried to email Sen Shelby and his email is down.
unit472,
I'm not sure how many well-capitalized banks there are, and even if there are lots, they may be fully extended (if well-managed, they probably are --- fully invested to maximize return to shareholders) in terms of what they are allowed to lend (regulatory capital constraints).
Depending on how much toxic waste is on bank balance sheets and what its true present value is, the 700$B might be a significant fraction of the capital in the entire banking system? I don't know --- I'm inclined to think that it probably is, otherwise the HP/BB plan couldn't make much of a difference. Can someone better-informed shine light on this?
But I don't think that the sound banks are able to take up the needed credit-extension function unless they get extra capital infusions, again because of lending/regulatory capital limits.
Comrade Misean: I think that might be the winner. More lyrics to play with. Mahalo.
I think we need to keep phones of our Senators/Congress People ringing off the hook to get a decent bill passed. All the pols I saw on TV tonight looks scared shitless and that is because of the outrage they have heard from the people (that would be us). We cannot get complacent. We need to make sure we don't let that Jackass paulson pull this off. It was so clear watching this tonight that he is a complete asswipe. I was actually hopefull at first, but he is basically saying, 'yeah, this is f'd up, but it is better than the alternative'. This is what a mugger says . . .'Give me your money or you will get shot'. It is the same damn thing and American (or any decent person) should not stand for it.
Denninger nailed it in his commentary today.
The Market Ticker
First, I really think there is no crisis. Oh noes,banks failing! To the printing presses!
However, if you do believe there is a crisis, and the govt needs to intervene, there is a model - the FSLIC assistance package - that can eaily be tailored to the current situation:
Capital loss coverage. Split the losses 80/20 with the govt.
Interest rate subsidy. Govt guarantee a rate, say 6%, on the underperforming paper. This could done on a sliding scale, 6% in period one, 5% in period two... This keeps the holder from holding indefinitely.
Tax benefit sharing. Ti the extent that tax loss carry forwards are created, the co's have to share the benefit.
Comrade Baholder CSC,
Gonna take a walk. I'll sling some stuff your way if anything tickles me fancy.
BBL.
Nostrovia,
--
Jas Jain Plan for Revival of Main Street America
Every American should get premium prices for all the junk that he, or she, has accumulated over the years.
We would have some $3Tr. in readily spendable money.
For full disclosure, Jas Jain will sell all his US Treasuries and close all short position in the Scam Market before the Plan is publicly proposed and considered by the US Congress.
Jas Jai
char,
you have my sympathy but you folks in Houston didn't loot your city or flood into Dallas looking or have incompetent local officials in need of Federal help. Therefore you don't exist in the eyes of the media even if Galveston doesn't have electricity by Christmas.
They'll pay attention only if you don't keep your refineries down long enough to affect gasoline supplies on the East Coast. THEN IKE will be a national story.
Comrade Bagholder CSC,
Hank why did you bank?
Hank why did you blow smoke?
Why must you give out the lies that you spoke?
Nostrovia,
Because of all the people that think this is not going through, I have restocked the shelves with my product. When Americans are ripped and bloody there is nothing more soothing than Auntie Bushka's!!!!!
Did anyone else notice HPs reaction when questioned about the inclusion of section 8 in their proposal? Sat straight up, stammered a bit and proceeded to not answer the question. Also he stated numerous times in his testimony that he didn't want to be there, or I wish I wasn't here. Is it unreasonable to suggest that section 8 was HPs" immunity from prosecution" clause. Whatever form this bailout takes(given who they're bailing out- GS etc.) hanks hands are going to look dirty. when the masses start looking for a scapegoat HP is gonna look awfully inviting. Anyway my guess is no section 8 and HP resigns as treasury sec.
Carlo - Shallow but deep!
Depressions are caused by a spiral of declining asset values.
Period.
If banks are themselves declining in value it may be a moot point.
Comrade Baron Von Helmut III writes:
Denninger nailed it in his commentary today.
"...ladle up..."
I like the soup kitchen metaphor....
--
addendum....
and there will no longer be any need for any bailout program for Wall Street.
Jas
Stop talking, bend over...
Let me introduce legislation
Cause at the end of the day, Old Hank will get his way
It's a banking tradition...
Reposted with a slight edit. Sung to the tune "Walk Like an Egyptian" by the Bangles:
All the old companies on the street
They don't stand a chance don't you know
If you short them too quick (oh whey oh)
They're falling down like dominos
All the trader men in the pit
They tanked the economy on a bet
Gold krugerrands (oh whey oh)
Can't be bought on credit
Sovereign funds with their Fannie bonds say
Ay oh whey oh, ay oh whey oh
Bailout from Paulson
Blonde money honeys with their calls
They spin the party line on CNBC
But the panic shows (oh whey oh)
Their voices crack as Asia falls
All the market makers talk their books
The sell into the rally don't you know
When the closing bell rings (oh whey oh)
They're collapsing like a Lehman
All the MBAs at the trading desk say
Ay oh whey oh, ay oh whey oh
Bailout from Paulson
Watch all the blood on the street
Clean out your desk then head out the back
Life is hard you know (oh whey oh)
You trade your Porsche for a Pontiac
If you want to find all the shorts
They're waiting for your stock to drop
They take their chance (oh whey oh)
Roll the dice on a bailout flop
All the carry traders with their yen
Insurance companies calling Paulson
And the Chinese fold (oh whey oh)
They need a bailout from Paulson
All the shorts on the market drop say
Ay oh whey oh, ay oh whey oh
Bailout from Paulson
Bailout from Paulso
CSC
Fortunate Son -- not even sure if you need to change a word:
Some folks are born silver spoon in hand,
Lord, dont they help themselves, oh.
But when the taxman comes to the door,
Lord, the house looks like a rummage sale, yes,
It aint me, it aint me, I aint no millionaires son, no.
It aint me, it aint me; I aint no fortunate one, no.
Does anyone know what the total regulatory capital of the US commercial banks is?
What the banks' share of outstanding MBS is?
Could the entire banking system have negative net capital on certain valuations of their MBS?
We need to obtain the valuation calculation and assumptions from some of the few real buyers of this crap paper. Maybe one of them will step forward for the benefit of our country.
"Austrian's have been screaming about the bubble since '03. "
In Dr. Kurt Richebacher's newsletter, he bluntly described the housing bubble, who was blowing it, how to recognize it, why it was done, and where it would lead, in 2001. That's right, 2001.
Comrade CSC,
"Stop talking, bend over...
Let me introduce legislation
Cause at the end of the day, Old Hank will get his way
It's a banking tradition..."
Yeah that's working.
Got the ipod...must do my walk.
Nostrovia,
We are from the government and are here to help you.
The Congress will solve the market's problems soon. Espcially the ones they knew nothing about as recently as five days ago.
CR from Dodd plan
(3) ACQUISITION OF SECURITIZATION POOLS AND MORTGAGE LOANS.The Secretary shall, to the extent practicable, acquire (A) sufficient ownership or control of pooled residential mortgage loans, or a securitization vehicle for such loans so that the Corporation has authority to modify the under lying residential mortgage loans, either directly or through a designee; and
Many of the Pooling and Servicing Agreements of these securitizations cap loan modifications to 5% of the aggregate principal balances of the loans outstanding. Additionally, the PSA will not allow amendments that benefit one certificate holder over another, without all affected certificate holders agreeing to the amendment. Changing this cap will affect certificate holders differently, and since some will be affected adversely, it is likely that Treasury would have to purchase all certifcates of a securitization, even the equity, to get the amendments through.
But then again, the Treasury could thow out the law of contract and just do whatever it wants.
Rich -
Thanks a billion for your astute observations. Looks like the Buffet deal will provide some juice to the market tomorrow.
Good luck on the SRS.
"Jerome,
I've been puzzling why Paulson would propose legislation which is so obviously dictatorial, extra-legal and dangerous, even with the careful orchestration of the Lehman Brothers/Reichstag Fire.
I think I've just figured out why they are doing it.
All the Fed's alphabet soup of emergency liquidity facilities innovated over the past year were structured around repurchase agreements. Toxic waste securities were used as collateral for US Treasuries and dollar credit at 85 percent of face value. But as each facility expires, it has to be rolled over and increased to keep pace with the implosion of credit in the interbank markets. Well over half the balance sheet assets of the Fed have been loaned out in this way, perhaps a critical amount in excess of this estimate. Without recapitalisation, the Fed is at risk of failure in the midst of this crisis. Its Enron-style accounting for the toxic waste makes it very vulnerable to a default by any of the repo counterparties it oversees and limits its ability to enforce any constraints as well.
The Paulson plan will provide a one off opportunity for banks to take their toxic collateral back and sell it at a Paulson-determined price for cash. He issues Treasuries to finance the plan which increases the supply available. He selectively decides winners and losers, of course in making the scheme available and pricing assets, creating arbitrage opportunities and survivor bias in the process.
In the meanwhile, the removal of the toxic waste from the Fed balance sheet and redeposit of Treasuries and cash as the repos unwind gets the Fed off the hook for having hypothecated most of its assets against worthless toxic waste at Enron-styled false valuations.
If I'm right, the Paulson Plan recapitalises the Fed without ever publicly admitting that it was dangerously overextended."
Would it be possible to enact a law mandating public disclosure of the actual performance --- interest and principal payment histories of the underlying assets --- of all SIVs?
That would seem to aid the price-discovery mechanism.
Perhaps it would also drive the banks out of business.
Last comment for the night - there comes a point at which trashing every solution that is offered meets it's maker. Trashing creates trash, and more trash... and nobody is being paid to pick it up.
Upthread Nades pointed out that during the last depression, people starved to death.
You want Armageddon ?? It's clearly there - if that's where you really want to go.
Final thought - - if we don't take this chance - - how many more will we be offered ???
Good night.
Popeye,
What do you like about this 700 billion dollar blank check?
I assume an economist like Bernanke with some finance knowledge knows what a "discount rate" is. I think many economists and analysts, some on CNBC, have no bloody clue.
I called congress again today, took several tries to get through, switchboard was very busy (good thing!) and I spoke to one senators office and one congressmans office.
Both oppose the current bill vehemently and want to take time to learn and craft an appropriate response.
I suggested they move to express a lack of confidence in Bernanke, he has either lied to Congress or he is inept (Containment), and Congress needs to hear from people who predicted that this would happen, and listen to their proposed solutions.
I will be calling again tomorrow - the calls are working. Keep it up! Congress is taking the time to step back, learn, question, debate....all because people are making a racket. If we wern't they'd just assume we didnt care, pass it and move on.
Keep calling Congress!
(202) 224-3121
Why is the hold-to-maturity price higher than the market price? Because there are not enough private investors with the same liquidity profile as the US Treasury. Most of these assets have longer maturities, and most private investors believe they may need their capital back for other purposes before this stuff matures. Since there is no confidence that there will be anyone else to take them out prior to maturity, they don't bid at all, or at best bid a price where they can live without liquidity. The Treasury can afford to wait, so they can pay more than the average private investor and still get a fair deal.
taxpayer giacutter writes:
We are from the government and are here to help you.
That was said at a banksters convention ...
China, Japan, and Buffet buying up surviving banks
Japan and Buffet buying up devalued American Banks:
Japan to the Rescue of Ailing US Firms - TIME
Expired
Buffet gets $5B in preferred stocks of Goldman Sachs (for comparison that's almost 100% of WaMu's current worth), plus $5B in common stock options.
Mitsubishi UFJ yesterday announced they will buy a 10% to 20% stake in Morgan Stanely, one of two major investment banks left standing. This is on top of the 9.9% stake China bought last December.
FBI widening mortgage fraud probe
The FBI is investigating for fraud at Fannie Mae, Freddie Mac, Lehman Brothers and AIG:
Business, financial, personal finance news - CNNMoney.com
Poll shows blame spread around, focused on Bush
Given a choice, voters blame Bush and a combination of Bush, Wall Street, Congress, and Homeowners:
http://allison-linnmsnbc.newsvine.com/_question/2008/09/22/1897791-whos-to-blame-for-the-current-economic-crisis
McCain's campaign manager Rick Davis
John McCain is allegedly mistaken when he said his campaign manager had no involvement with Freddie Mac "for the last several years". Rick Davis's firm was paid $15,000 a month in 2005 until the takeover - allegations are Rick did no real work in return for the money:
NYT: McCain aide’s firm was paid by Freddie Mac - The New York Times- msnbc.com
From the New York times. McCain probably didn't know and doesn't care.
More than 3/4 of Americas concerned, believe bailout benefits crooks
Sep 19-21 poll shows 79% worried about inaction, 77% believe the bailout would benefit those responsible for the downturn in the first place:
Poll: Needed financial bailout rewards bad behavior - Sep. 23, 2008
This is why knowledge and awareness is so important. I don't want inaction either, but we're being given only 1 choice right now and that's the bailout route. We need to take the route of responsibility and tighten lending standards and stop manipulating the bubble. If credit is the issue, then set aside money to lend to banks in return for valuable collateral - don't buy the riskiest collateral when the housing bubble is still deflating. And don't reward investors who've only owned these financials for mere days or weeks, at the cost of the honest banks and taxpayers.
You and I suddenly owe China a lot more money
The average American citizen's share of national debt has risen from $31,728 to $36,857 from all these bailouts, most in September alone. We're paying interest on that to China, of course:
http://bubbletracking.blogspot.com/2008/09/i-pledge-allegiance-to-debt-of-united.html
My Proposed Solutions:
* Enforce sane lending standards once again like income verification and non-exotic loans, standards that Credit Unions and surviving banks practiced
* Provide liquidity to honest banks that have legitimate short term needs with short term loans based on solid collateral
* Prosecute career criminals who intentionally perpetrated the worst of the housing frauds
* Work with banks to find responsible ways to resolve mortgages, as long as those people live in those homes, have been making at least some payments (rather than none at all), and have the ability to reasonably afford the home they live in.
* Don't bail out flippers, fraudsters, straw buyers, speculators, and people who bought homes they knew they couldn't afford by lying on their applications.
* Restore confidence to the market through calm words and actions, react to facts and search for sensible alternatives to more of the same.
ren writes:
Popeye,
What do you like about this 700 billion dollar blank check?
ren,
NOTHING. But I'm not fond of the other choice either.
Now - GOOD NIGHT !!!
ren,
There's nothing to like about the blank check, but it appears that that is not what we will get. There will be equity participation (though that may deter future private equity inflows) and Congressional oversight.
Doing nothing may result in a great depression --- I don't understand the degree of leverage in the real economy to confidently predict, but I think that most companies have to borrow at some point in their annual cash-flow cycle. If credit shrinks to the present statutory multiple of regulatory capital in the banking system, there will be significant, perhaps massive, contraction in the real economy.
Perhaps what is needed is gradual deleveraging of the real economy. THat might mean a lower long-term level of output and lower living standards. I'm OK with that. Doing something now, if it is effective, will buy time. Will we use it wisely? I hope so.
I'm inclined to agree with popeye that to simply say "F"-em and wait to see what actually happens, may be deeply unwise.
capital geek writes:
Why is the hold-to-maturity price higher than the market price? Because there are not enough private investors with the same liquidity profile as the US Treasury.
oh BS ... many of these traunches are worthless now and with falling home prices more are becoming worthless by the day ...
Sell your crap somewhere else ...
[White House Deputy Press Secretary Tony] Fratto said it would be "unthinkable" for Congress not to pass legislation this week, asserting the result would be a "very, very serious situation" for the U.S. economy.
......
Fratto insisted that the plan was not slapped together and had been drawn up as a contingency over previous months and weeks by administration officials. He acknowledged lawmakers were getting only days to peruse it, but he said this should be enough.
Have you guys already seen this? MONTHS? I don't know why I'd be surprised...
Popeye: It shouldn't be this solution or nothing. Many have proposed ways to deal with this, yet we are told that either Hank blows a tril or we all starve.
So it's bailout or bust?
The truth is, if Hank blows a tril we probably starve anyway.
In other words, if you are going to be beaten to death, it is not better to be sodomized first.
Dude, totally unfair to ask Bernanke a tough question like that! Beta on portfolios?
C'mon, give the guy a break. After all, he is "just a Professor of Economics"
Frankly, waterboarding and death are too good for both Bernanke and Paulson. Bernanke is in way over his head and his refusal to admit this is costing our country dearly. Paulson knows exactly what he is doing.
OT: Is that chemistry.com ad in the upper right hand corner actually a picture of our hosts Tanta and CR?
Heheh. That would rule.
Tranches...senority....vintage....blah, blah, ablh...the underlying assets mean squat. There is no market because the market changes each morning. Each day someone else looses their job, gets sick, says I've had enough....The value will bottom before folks think and that is when we can build a foundation for value. As an appraiser, it is worth what someone is willing to pay for it. Right now...it aint worth shit. Maybe down the road in 6 months to a year you can mark to a market but until there IS a market....it still aint worth shit.
Comrade Kristina: Are you serious?
Months and months of preparing this measure and all they could come with was "uh, like give us 700 billion smakeroonies and we'll, like, you know, do stuff with it. But, like, no do-overs and no, like, harshing on us if we fuck up!"
Some time ago there was a post here about buying houses for $10k-$20k in Atlanta--cheaper than a car, as I recall.
As it turns out these houses were appraised at $100k-$150k for both mortgage and tax purposes. (One day, one of the local TV stations ran a story about the city's tax collections being $20 million short. Guess what? It was due to the appraisals on this same category of houses that weren't worth anywhere near their claimed value that was at the root of the problem, but the story never got that far.)
I think this is the kind of "asset" that Bernanke and Paulson are proposing that we pay "full value" for.
In other words, buy the pig in a poke. But a pig in a poke is still a pig, even if it has lipstick on it.
The Bush admin knows this won't go 'as is'.
So the stock market will black mail Congress when it starts tanking after not giving them what they (Bush / Wall St) want.
Bush, lieutenants will say 'told you so.'
Then the REAL mother of all bailouts will be introduced and passed in 15 minutes.
SRC
without getting our hands around the whole problem these efforts are a ddelaying tactic ...
We need a bank holiday to audit every depository institution that holds this crap ...
Fortunately it looks like a mere 20-25 banks hold 99% of this crap ...
SRC:
replace "bank failure" with "credit contraction" and I think that you have nailed BB's concerns
I think I recall his exact words being "cost of credit intermediation" (CCI, I found some of his old papers on google scholar). That is, the major contribution of banks to the economy was that they kept the CCI low, and when banks failed we lost all the expertise which they had in pricing and distributing credit risk, resulting in a spike in the CCI, a credit contraction and hence the Great Depression.
This of course has always made me wonder--haven't Tanta's posts over the past year essentially been an education in how exquisitely shabby the big banks had gotten when it came to evaluating and distributing credit risk? How they eliminated the "back office" people who really did the work of figuring out whether someone would pay back a loan, and instead substituted it with poor one-dimensional metrics like credit scores or, in the case of NINJA, nothing at all?
This is what makes me extremely skeptical that a bank bailout can actually serve Bernanke's intended purpose: keeping the CCI low.
I've wondered weather the USG could become the lender of first resort. I think it wouldn't work. One of the functions that banks perform (all those loan officers) is to evaluate and price the credit risk of would-be borrowers (small businesses, or home-buyers). I don't see how the USG can do this without hiring all the people who do it now. And to skip that step would be kind of what the mortgage originators have been doing in recent years.
Better to nationalize the banks and take over the risk pricing function that way. That might work (in my fevered imagination)
SRC
I've often wondered if some new innovation like prosper.com on a larger scale could be a real means of keeping CCI in the case that banks fail or become unwilling to lend. Probably of course much too small for the scale that Ben and Hank have in mind.
edit: "keeping CCI low"
Carlo,
Thanks for the correction and illumination.
Cheers
I live in Atl and can vouch for the 20-40K for a house. It is not worth the 150K loan because people with jobs and families do not want to live in those areas. You or your kids have a 50/50 shot at making it out alive by the time they reach 18. The dollar figures are correct. Most of those homes were investor purchases. The only way to value real estate in those types of markets is a rental income approach to value. That is sketchy because a lot of the rental data is private between tenant and landlord. Most of the homes are boarded up with no tenants anyway. Investor value driven markets are speculative in nature and can values can swing wildly with market sentiment. Right now....you can't give one away. If you want to buy dope....the market is ripe with buyers.
It's still interesting that GDP isn't negative and they're spending money like there's no tomorrow.
Does anyone have any memory how past recessions were treated?
I know Bush implemented the tax cuts in 2001 and Greenscum started his massive FFR cuts, but I don't recall anything other than that (maybe bailout money for the airlines after 9/11?).
I know this time is vastly different (with fraud, massive leverage), but I'm curious about similarities and differences.