I would say the RTC would be a bad example to benchmark. While it pales in comparison in scope to todays problem it is exactly what we wouldn’t want to see again. Ask John McCain about the RTC.

I don’t know. I’ve just been overidden(again,,,) and when I saw that self congratulatory group of Senators immediately after the vote I heard that silver haired Geico lizard- Chris Dodd, giving himself and Barney the Frank BZs… I “feel” dread.

I do understand the math you present however the will to actually collect those funds from their constituents seems highly unlikely for any politician, especially if we are unfortunate enough to suffer under a taxing Obama administration and Democratic congress. Goverment making $$ is alien to me….

It’s done though. I truly hope you’re right.

b2

But the question remains, who can we trust? With proper oversight I can see where this could be just as successful as the Resolution Trust Corporation operation. I agree that constant vigilance would be required because the Dems might try to add back in money for ACORN or try to give bankruptcy judges the power to rewrite mortgages. Both those provisions were in the original Dodd/Frank proposal and were bargained away by the Repubs. In fact most of the Dems voting no did so because those two provision were not in the bill.

Even if 25% of the mortgages in the MBSs are in default not all of that 25% would be lost. The mortgages are secured by real property, which may not, at present, be able to cover all the indebtedness, but would probably cover 60-70%, worst case. So, the worst case actual losses would be 40% of the defaulted mortgage values.

Back of the envelope figures. Say you have an MBS with 100 mortgages. If 25 % are in default and each mortgage was for $100,000 (simple round figures) that gives a possible total loss of $2,500,000. However, if the foreclosed properties are resold for an average of $60,000 each the total net loss is $1,000,000. If the value of all 100 mortgages (at $100,000 each) is $10 million, that means the overall net loss for that MBS is 10%. If the gubmint buys these things at 60% on the dollar and my analysis is correct, it could return a profit, although it would probably take 6 -10 years to work itself out. During that time we need someone trustworthy outside the government watching and auditing. That is a provision that all citizens should be urging their Congress critters to provide.

No. You are not. You are a thoughtful optimist.

My problem is only with your:

“Over time, as the MBSs are paid back, there is a good chance the government would make money on the transactions.”

Do you trust any side (Dems, Repubs or Bush administration) of this to actually execute that? How many people does the IRS let go who owe money that can’t pay. As soon as the SOBs start whining the government will relax and before you know it, 700B will be forked out to the perps…

Imagine an eventual dem plan to erode and reapportion that 700B chunk of wealth via socialism. Sec Paulsen? How do we know he won’t just give it to the “Masters of the Universe” to play with?

My problem is I don’t trust the leadership to do the right thing…Look at that idiot Pelosi- she had a deal early in the week and she couldn’t keep her nasty piehole shut for an hour…Imagine what she and her kin will do once a bailout/rescue bill is approved?

As for your other regulatory policy change proposals, perhaps a cumulative application of those, and others, could bring us out of this without too much pain and taxpayers money wouldn’t have been put in “Harms Way”…

b2

First this is a crisis of confidence. It was caused by the realization that Mortgage Backed Securities (MBSs) were not the guilt edged income investments that many thought they were. It came as a surprise to many people that some of the MBSs had some sub-prime loans in them. When the real estate market turned down, some of these sub-primes began defaulting. Most investors bought these instruments for the income. Locked them up and collected the income until all the mortgages paid off. They carried them on their books at cost or near cost because they were “solid.”

When the real estate market turned down, the rising defaults created doubt that these were as solid as they thought. How to value them? When they asked the SEC and FASB they were told to mark them to market. Big problem………there was no auction market for them and never has been. What the …….??

Some banks decide to sell a few to “test the market.” By that time the word was out that these things were possibly loaded with sub-primes. The bid was 20 cents on the dollar. Obviously ridiculous, but that was the market. They had to write down their MBSs to market. If a company had 30% of its reserve capital in these instruments that meant an immediate 24% loss of capital. The companies tried to sell equity, bonds and preferreds to raise capital. Problem was the market was now spooked and it became hard to raise new capital via the normal channels. Enter the short sellers who drove the equity prices down, reducing capital further. Banks and insurance companies have to have a certain amount of capital reserves to continue to do business. Many companies were below the necessary levels and were having trouble reliquifying themselves. WaMu, AIG, Bear Stearns, Wachovia, and others were caught out. Fear increased and confidence decreased. People started running for the hills. There is over two trillion dollars sitting in money markets, T-Bills, mattresses, gold, and other “safe havens.” That is money that is normally in circulation. Now the banks are getting scared and don’t want to loan to each other. Blue chip corporations like McDonalds cannot get money to upgrade their coffee machines. The credit market is not frozen, but it’s close. When credit declines economic activity declines.

What to do? Well, first, let’s look at the value of the MBSs. There are approximately 90 million mortgages in the USA. About 12 million of those are sub-prime. So, about 78 million are what are called prime mortgages.
2.8% or 2.2 million of the prime mortgages are in default. About 20% or 2.4 million of the subprimes are in default. That means about 4.6 million or 5.1% of all mortgages are in default. All the mortgages in this country are not in MBSs, but suppose, to be conservative, that 10% of all mortgages in the MBSs are in default. This is just back of the envelope figuring, but it seems to me that there is a good chance that these MBSs could be worth 90 cents on the dollar. Assuming a really horrendous case, lets say they are only worth 75 cents on the dollar.

Enter Hank Paulson. Could not the Treasury buy these instruments from the companies for 60 cents on the dollar and immediately inject liquidity and confidence back into the credit markets. Over time, as the MBSs are paid back, there is a good chance the government would make money on the transactions. That is, as I understand it, what is being proposed. There are other wrinkles in the bill, but that is where the big money will go.

There are other ideas out there that would work as well. One I like is to suspend mark to market pricing, let the companies revalue their MBSs at 50 cents on the dollar, have the treasury buy protected preferred shares (ala Buffett and Goldman Sachs) to inject more liquidity, with the proviso that the MBSs would be gone through mortgage by mortgage to find the true value (about an 18 month process). This option might require less government money.

Additionally, I like the idea of suspending the cap gains rate on investment real estate for five years. This would give real estate investors and vulture funds incentives to buy up the foreclosed houses with an eye to renting them and eventually reselling for a profit. This would help to stabilize the real estate market.

Time is of the essence. The longer this goes on, the more fear and uncertainty is injected into the system. Also, it is not as if the Congress could not come back and modify or fine tune the reliquification (I prefer to call it that rather than a bailout.) as necessary.

That’s the way I see it. Are my glasses too rose tinted?

So let’s start drilling and begin to make a dent in the $400 billion we send overseas each year. That’s $400 billion that goes up in smoke, but in the rescue plan it is $700 billion actually invested in assets. The government will be purchasing troubled mortgage-based assets at depressed prices.
The key here, as many financial analysts have pointed out, is that the U.S. government, and hence the taxpayers, actually stand to profit from this plan. When—not if, but when—the housing market stabilizes and recovers (as it always has), the government can then sell those assets it purchased in many cases, perhaps most cases, at a profit.
So people are outraged about buying mortgages, but they seem indifferent to the fact that we’re sending $400 billion a year overseas for foreign oil.