Cry havoc, and let slip the bears of Wall Street! That’s what the American people want. That’s what (according to many sources) are filling Congressional switchboards with constituent calls at a rate of 1000:1 against supporting the bailout bill (expect some serious variance depending on the member and district). Still, ya gotta hand it to the American people who FINALLY spoke out with one voice!
How did it die?
Nancy Pelosi (D) and other Democrats’ arrogance killed it when they tried to force Republicans to back a deal that was made largely without them. The reality is of course that if the bill presented was worthwhile, then the Democrats who control Congress could have pushed it through on their own, but there was bi-partisan disdain for it, and that’s how it failed.
Why did it fail?
The reason for the bi-partisan opposition to the $700billion dollar Wall Street bailout package was because there was no $700billion dollar MAIN STREET BAIL OUT PACKAGE. While Barack Obama is on the trail complaining that trickle-down economics don’t work, his party is on The Hill trying to say, if we don’t make things better at the top of the financial food chain, then nothing will trickle down to the rest of America; ie, money does trickle down from investors on Wall Street to people on Main Street. You cannot have it both ways.
How to get it passed?
The solution is simple and three fold
1) The Democratic Party leadership has to act bi-partisan, and that means stop finger-pointing at Republicans for allegedly creating the problem all by their lonesomes (lack of Democrats’ Congressional oversight comes to mind). No way are they going to get support from Republicans while bitching about Republicans
2) The American people have to be convinced that money trickles down from mega investment groups like Freddie and Fannie down to Joe’s Plumbing, and that means Senator Obama’s gonna have to shut up with his ranting about raising taxes on investors, business owners, etc as if it’s not going to have a negative effect on investing, hiring, and pay for average Americans
3) If they want to give $700billion to Wall Street, then they’ve got to give as much to Main Street. There are 102million households in the country that are not owned/paid off. Give each one a tax credit of say…$7000, and bammo! People aren’t in foreclosure, spending goes up, govt doesn’t have to buy the homes ’cause now the owners can make their payments, and everyone’s happy.
Barack Obama talks about pain trickling up to Wall Street. Ok, step up Big O. Give the money to Main Street so they can pay Wall Street, and that will buy the Congress time to re-regulate (more regs or less regs) and solve the problem.
And by the way……!
Could someone give Senator Obama the memo from the DNC (or Congressional Accounting Office) that the war in IRAQ DOES NOT COST $10, 12, or 20billion a week as he claims. It’s about $550billion over 5yrs, and while that sounds like a lot, it’s nothing compared to $700billion in one week that the Democrats’ Congress wants to give to Wall Street so it can trickle down to Main Street.
QUESTION:
While Barack Obama is saying that he’s going to tax the highest earning 5%, and make them pay hundreds of billions of dollars for his littany of programs and giveaways…isn’t it odd that we’re supposed to believe those same 5% need $700billion right now?
Author of “Reparations and America’s 2nd Civil War
Reparations and America’s 2nd Civil War: Malensek, Scott: 9798864028674: Amazon.com: Books
For the last 24 hours, I’ve been smelling a red herring of a bill here. I feel John McCain and half of both parties did too and stopped Paulson & Pelosi from pulling a fast one through exagerated fear mongering and out-right lies about what will happen to the markets. So now I hear computers automatically sell off and buy stocks! This is freaking crazy!
I say NO BILL, let the chips fall where they may. If people or businesses gambled and lost, let them lose, it’s part of the game.
People keep saying credit will dry up, but only for those with bad credit. Not all banks will fail. Most, if not NONE of credit unions will fail. Interest rates have DROPPED, OIL prices have DROPPED. Where’s the beef? Where’s the crisis? Where’s the Black Friday/Tuesday Egg on Wall Street?
Well it should! If people can’t pay their bills on time, they don’t need more credit, they need to learn to tighten their belts and discipline themselves. They don’t NEED a new car every two years, They don’t NEED a house bigger than their families need to live.
I am sick and tired of this country living on credit and not saving a dime. Now we owe China $500 billion??? And is that money secured with American soil or American soiled paper? Credit is not wealth it is not equity, it is money owed. It is debt!
This was inevitable. I don’t care about the Democrates (Of whom which I WAS one, past tense) screaming about people losing their homes. I got my mortgage in 2003, an adjustable, that is at 5.25%!!!
If anyone signed one of those sub-prime mortgages, they were either lying about their income, or bought more than they could afford, or bought an overpriced house that has now depreciated to reality and they need to sell or refinance but can’t due to too much loan(s) and not enough value.
I do not want to bail out a bunch of gamblers when I do without a new car and many things to live within my means. This is flat crazy.
This was not a bank bailout.This was an extension of liquidity where the economy needed it, what is what the Fed and the economy were created for.For the cash, the Treasury borrows by selling bonds in the market.They must seem like a safe deal for a lot of people, because the rates on the Treasury bonds keeps dropping.The treasury was to buy mortgages, a form of long term debt, for cash at auction prices, which meant that the Fed was geting a good deal.The cash for mortgages allows the banks to become lenders again to their customers.If this doesn t go thru in some form,the banks will have to sit worth the mortgages until they are paid off in twenty or thiry years.The oppostion to the bill seems to be based on a desire to cause pain to everyone everywhere who has a dime in a bank or a share of stock in their savings plan.I don t understand that reaction, but we have experience with this kind of retribution. FDR and the Congress in the thirties went after everyone in the private economy and the result was the depression which wasn t much fun.
I’ve been following Fox, CNN, and all the other channels on what’s been going on. And all that I’ve gotten out of this is what’s in this post, that Pelosi’s arrogance and retardedness lost the vote, that John McCain invested a lot of political capital in trying to turn about 60 votes in favor for this bill, and of course, CNN’s blaming McCain for injecting presidential politics while being ignorant to the fact that he was needed there and he was there actually turning votes to solve this. Just some questions I would like answered, though. [Note: not all of them answerable].
1. I do have to admit that I don’t know much when it comes to economics, but is it really a good idea for the government to get involved? I know that both parties tried to get together and tried to put politics aside to get this together, but in the end, would this really have been a good idea?
2. If Pelosi was really the reason behind why those Republicans turned their votes to “Nay”, why are they being so overly-sensitive to that incendiary speech? I understand that I’m whaling on my own party here, but if that’s really the reason that they turned their votes, I can’t help but feel that those guys are being nothing but big fat babies.
3, and perhaps most importantly, why did that bitch Pelosi had to say what she said at a time when partisanship in Congress is high and at a situation that took a lot of effort to bring the two parties together? Why couldn’t she just keep her big mouth shut and ignite the anger that lost the vote?
I agree BevAnn, and I’d like to know why we can’t give $700bn to homeowners if the problem is the housing market. Those homeowners would see that THEY were getting govt help not the top 5%, and the homeowners could get caught up or ahead on their payments.
I also don’t understand how Sen Obama wants the $700bn to go to Wall Street, then he turns right around in the same speech and says he wants to tax the top 5% of Americans who are investors, business owners, etc. What’s the point of giving then taking away?`
there are so many fallacies in these posts that it is hard to know where to start, but letsw just look at the idea of giving 700 billion equally to all citizens so that they could pay off their debts.1/the treasury gets nothing back for their 700 billion, so the national debt goes up. We each get 2300 or so, and our share of the national debt goes up by the same 2300.Whether the money is used to pay off the mortgages is kind of doubtful, but it is a sheer expenditure for nothing returned.
On the other hand the 700 billion is an upper limit for the Fed plan. If the Treasuries bids for mortgages establish a price for these that are attractive to private bidders, not only will the Fed not need to buy the mortgages, but , and this is a really significant but, the mark to market rule means that the higher mortgage prices from the auctions, will immediately improve all banks credit ratings, changing their capital ratios and allowing some lending to be freed.This is a complex issue, but it is not a bailout, it is not a gift to anyone,The Treasury borrows at 3%, the mortgages yield at least 10% even after the failures are considered.Injecting cash where it is needed is what the Fed and the Treasury do every dayjust not on this scale, but we have not had a need like this since the thirties.
John, I only suggested it for homeowners-not every American.
This was not a bank bailout.This was an extension of liquidity
If the government buys something (mortgage debt) from banks for less than they can sell it for on the open market, that would be a bailout, even if various government figures (and their dupes, like you) like to try and put lipstick on the pig by using fancy words like ‘extension of liquidity’.
what is what the Fed and the economy were created for
A reasonable person might wonder why the Fed’s existing power to increase the money supply via interest rate manipulation are not sufficient.
but, the mark to market rule means that the higher mortgage prices from the auctions, will immediately improve all banks credit ratings, changing their capital ratios and allowing some lending to be freed.
So by artificially inflating the bank balance sheets (through distortion of the mortgage debt market), they will allow the banks to double down again and make even more bad loans. I think your arguments would make some sense if the financial problems we see were merely a result of some panic, but what we are seeing is not some irrational aversion to risk; it’s the logical end result of a decade of government-mandated malinvestment, compounded by an unregulated market in credit default swaps.
Scott & John e Morrissey:
Scott 1st; NO NO NO! NO to bailing out homeowners for the reasons I stated in my above post. This would be equal to the Fed going to Vegas to give gamblers back the money they lost! NO NO! Let these borrower’s learn to take an individual hit and learn to live within their means, NOT within the tax payers means! It is not fair for me to play by the rules, live within my means and then have to bail out others who live large and lose. Oh Hell NO!
Morrissey: Lenders make their money up front in points, origination fees, underwriting fees, etc. The first 5 years of mortgage payments are mostly interest not down paying of equity. Most of these mortgages that are failing are less than 5 years old, which means they made money on all that front end interest. Monthy payments coming in IS cash flow for the banks.
These Sub-prime mortgages that are foreclosing because people stopped making payments, thus, the cash flow has dried up. Justify to me why We, The People, should buy this bad debt, spend money to throw American citizens out of their houses so we can sell the property to get our money back?!?!? Um, don’tcha think people will then scream that the US GOV is throwing her citizens out in the street? What do we do? GIVE these people their houses for free so they can then turn around and get another sub-prime loan to the hilt just to default again? To quote John McCain, Oh Please!
We don’t need to protect these lenders and borrowers from the black eye they asked for.
The only credit that will dry up is the sub-prime market which needs to be dried up anyway, as we need to eliminate this element from within our economy, permenately! Otherwise, this will just keep happening again, and again and again.
To anyone who cares to listen:
NOBODY needs or has as of yet JUSTIFIED $700 billion!!! We need to lift that rock of Pelosi and find out who she is protecting or enriching with this Bill.
The Sub-Prime market must be limited or eliminated. Period. Clean up your credit people, suck it up. Don’t spend more than you earn!
Loan businesses $ IF they prove they are credit worthy and at a profitable interest rate, secured by good assets at a low loan-to-value ratio to eliminate or reduce risk.
the sub prime market has been eliminated . It is long gone.Let me shed some light.This is not the problem any longer .The problem that is trying to be solved is that the banking system is laoded with mortgages with varying degrees of default possibilities. If these mortgages were evaluated by standard accounting methods, using the cash flow from the mrtgages, discounting for the failures, marking assets down as required( even by the deadly and error ridden mark to market method)the average mortgage package would be worth, based on the cash flow produced at between 75 % to 90% of the face value of the mortgages.The problem occurs when the banks bill come due,and they need to sell off some of these mortgages.(Think “Its a wonderful Life)Normally they would sell them to other banks which need them for their investment portfolio.Now they cannot get a bid.Ambac was offered 30% of face value for a re cent package and chose to hold them, meaning they can make no new commitments for businesses that need cash.IndieMac and WaMu were both put out of business even tho both were siound when rumors on TV caused runs on the banks deposits.If the Banks and the public were assured by this bill that there was a floor provided by the Treasury,neither of these would have failed. The failure caused thousands of good honest hard working people to lose their jobs and shareholders to lose fortunes.Their assets were sound, their liquidity was not.
To BBartlog.You raise several issues1/ If the govt buys something at prices zaabove the open market that is a bailout.Right.It would be if there is an open market, but the point is there is none.The mortgage market has frozen.Merrill sold their very large mortgage package for 22% of face value and took a huge loss, but basically there are no bids.2/The fed has been trying to do this but the banks are so fearful of their own liquidity needs they are turning around and investing the money in T bills and taking losses on thes in order to be sure their cash is safe.This does not help the guy at the grocery store or the pizza parlor.To put money in banks the Fed buys their bonds,in this plan the Fed injects cash by buying at auction prices, and therefore low, the bonds (I O U s) the banks hold from homeowners.3.Marking to market for mortgages is a new idea, never tried where the market simply has shut down.Keeping the value of mortgages at the value of the mortgage is not an artficially high mark, it is the most likely price.Finally, you are correct in your assessment of the several of the major causes of the problem, it was govt mis management without question and those pernicious credit default insurances.But if you don t think there is a crisis, take another look at the bank and Sand L failures and the money and jobs lost.The govt stupidity and cupidity caused this and unfortunatel they are the only one large enough to fix it as well.
Is a bailout for the banks or is it a bailout for the goernment’s bungling?
Keeping the value of mortgages at the value of the mortgage is not an artficially high mark, it is the most likely price
You make some interesting observations. It sounds like you have a lot of experience with a big chunk of the problem. A question (I don’t know if you know the answer, but maybe someone else here does): is the market for mortgage debt frozen in part because the bundlers and sellers of tranches of this debt have too much information vis-a-vis the buyers? See this wikipedia entry for an overview of the kind of problem I’m talking about. If I knew that there were tens of billions of mortgage debt out there that was based on semifraudulent real estate valuations (thus making the paper worth a lot less than the value of the mortgage), I would be hesitant to buy *any* mortgage debt, even if I knew that the average value was the 75 to 90% that you mention. Because after all any seller is going to be wanting to offload their poison and not their good debt, and I’m guessing they have the means to hide it.
john e morrissey, your posts are rife with typos and lack of spacing between sentences and
establishing paragraphs, so your points are more difficult to decipher. This blog provides an
option to edit for several hours after posting, if you would like to go back and clean them up a
little.
The purpose of this bill was to SAVE the sub-prime market and to take over the bad part of Wall
streets portfolios. Sub-prime credit might be temporarily curbed right now, but they are just
waiting on Congress to unleash them again with the influx of cash. There is a bunch of trash
talking about the whole market crashing if this bill doesn’t pass. Well, I don’t buy it.
Why would you buy a mortgage investment that the mortgagee is not making the payments on or
potentially not make the payments on?
When my lender made my home loan, they kept the note ‘in house’, they didn’t sell it on the
secondary market. Why? I am a profitable secure investment as I pay my bills on time and my
LTV is low. The paper is only as valuable as the property securing it and the mortgagor paying it.
The only reason a mortgage is sold in the secondary market is if the lender made their money up
front in the form of points & fees, or it is too expensive of a risk to keep. In the sub-prime market,
Points and interest rates are very high, and the money is made on the front end, not the back end.
Once the loan is made the only profit available is the interest it pays, if it pays. Banks are not in
the business of flipping houses as that is management intensive. They are in the business of
collecting interest.
Never is a mortgage sold for more than the equity securing it and property values have dropped.
It is sold based on its long-term profitability. It is not equal to the stock market which is more like
playing the lottery than investing. The have become tied to whatever is spewed on the mainstream
media who is knee-jerk at best.
If someone borrowed money 3 years ago, at 100% loan-to-value, and now the house is worth
80% of what is owed, the chances of default is pretty much 100%. So this is what you are buying
when you buy these bad loans:
1. You are buying a note that is going to or already has defaulted.
2. There is no cash flow coming in, thus, no interest being paid to you. You are losing money
every day that goes by.
3. The longer you leave the usually resentful borrower in your security, the greater the chance of
deferred maintenance or spiteful vandalism.
4. You have to foreclose the mortgage (court costs & attorney fees)
5. Be the bad guy by evicting the borrowers (NO WAY does the Government want to be in
THAT position politically) which is more attorney fees
6. You have to spend money repairing the property
7. You have to pay a realtor to sell the property
8. You have to sell the property at a high enough price to compensate for you initial investment,
the above listed costs, and if you are lucky (not) you must sell it at a profit.
It just is not a good investment unless sold at, at least 40 % not 90% as you suggest, bu t still, the
government would have to hire a staff to evict, rehab and flip their investments.
Timothy, I would say BOTH; the gov for deregulation and the banks for taking maximum advantage of that deregulation.
The problem is we need efficient government oversight to keep the foxes in check or they run amuck, as they have done. You just can’t expect the foxes to restrain themselves without the government protecting the hen house.
BevAnn… just curious as to what “deregulation” you are speaking of. And considering that Fannie and Freddie did have oversight by the government, how is it you believe they need to “protect the hen house”.
You comments do not make sense to me.
BTW, how do you know your loan wasn’t sold on the secondary market? There is a difference between a bank retaining the note, and retaining the service contract on the note. Many banks sell the notes, but they make good money on the service contracts. So tho you are sending your check to the same place every month, that doesn’t mean they still retain the promissory note on your property.
BevAnn,
I don’t want to sound argumentative, but what “deregulation” are you referring to?
The Feds forced the banks to loan money to people who had no business buying houses.
The Justice Department threatened prosecution for the banks who didn’t meet established numbers in regard to mortgage redlining.
Repeatedly the regulatory agencies ran up the red flag about Fannie and Freddie only to be rebuffed by the Congress.
It doesn’t do much good to install a fire alarm if you’re just going to ignore the siren.
bev ann the subprime market is dead and will never be revived.the purpose of the bill is to unfreeze bank lending,We have actual experience all over the world right now to look at.why anyone would revive sub prime loans is beyond thought.
bartblog partly right. it is tough to look at a hundred million of mortgages and see where the excessive high valuations are,You can how ever evaluate by who is paying on time. Most of the defaults are 2005 or 06 vintage.If the mortgage was issued in 2005 and the payments are prompt then the chances are that this is a pretty good evaluation.
The rate of new defaults seems to have fallen off, so we are getting closer to where the mortgages might be able to be valued. One prob though is the mark to market which forces banks to mark the values below what they think they can get if they just hang on to them, tending to freeze these assets.John Shadegg A Repub says if the Treasury would have agreed to get rid of mark to market he can deliver fifteen no votes to yes votes .We ll see.
John E… go check out the alternative solutions for the bail out (i.e. mortgage insurance on the toxic debt, preferred shares to the private market for infusion of liquidity, etal) that some economists have proposed in my Congress ignores other solutions post today.
You will also find the IMF Sept 2008 80 pg study on resolving banking crises, with historical results from preceeding failures, quite interesting.
You and I agree somewhat on cures. What you and I don’t agree on is that the cure comes from the taxpayer.
Mata
Aye
john e
Don’t have time to answer your Q this morning, but I will when I get time tomorrow. Meanwhile here’s a little gem to ponder:
Barack Obama and the Strategy of Manufactured Crisis
http://tinyurl.com/4dzmmq
I have in fact reviewed all the ideas suggested by MH and others as well.In case no one noticed the Fed yesterday injected 640 billion into the banking system thru the normal purchase of reserve system bank bonds.The 90 day note yield dropped further telling you what those banks did with the money.The ECB injected an additional 80 billion into European banks.
There are lots of solutions proposed but the best solution is the one proposed because it ains precisely at the problem which is that no one knows how to price the mortgage bonds which are the biggest asset. The real target of the Treasury plan is to establish real free market prices by an auction system.
My guess is that after the initial rush, the Fed will be outbid for these assets by other banks as it becomes clear what the values are.This is not a bailout. It is the Fed and Treasuries main function. Putting money in banks when it is needed to, except that this time they will be using a different mechanism for which they need authorization from Congress, because as we saw above , using the usual mechanism of inserting cash into regional banks doesn t produce results.
It will not cost 700 billion.It will make money for the Treasury.Not more than a half of the money talked about will ever be called upon.This is the cheapest plan of all those proposed even if things don t go well.It has been abysmally explained by people who should know better as well as most of the financial press.
sorry i mean to keep these short but never quite make it. The question I wanted to ask is”Was the Feds 640 billion insertion into the banking system yesterday buying the bonds of banks a bailout?”Or was it the Fed doing its basic job?
I have to disagree that this is the cheapest plan of all proposed, John E. This doesn’t recapitalize the institutions… just buys the toxic paper.
Other suggestions for injection of cash that are less burden on the taxpayer, and more on the creditors and shareholders
1: preferred shares into those firms
2: “matching injections of Tier 1 capital by current shareholders to make sure that such shareholders take first tier loss in the presence of public recapitalization”
3: suspension of dividend payments
4: debt for equity swap
There’s also no HOLC type entity created to reduce homeowner debt.
Now, I thought it was about $630 bil inserted yesterday, but $640 bil sounds close enuf to me. That’s 90% of the bail out. And it’s done what about the problem? Did the bail out of AIG a few weeks back help the Bank of Switzerland? Again, the IMF review of crises history is proven correct. There are more effective ways. And instead, what we get from everyone is this is the *only* way or it’s doom and gloom.
Well guess what… when you’re at the end of an overspend, over leveraged bubble where money has been loaned out on below inflation rates, there is no clean and easy happy ending.
But throwing the taxpayer’s money at this as asset purchase is just not going to work. I don’t know if you read that 80 page IMF study on the way the various banking crises were addressed. But historical actions are just not on the side of the way Paulson/Bernanke & Congress structured this.
You were saying the bill was “badly explained” when it was a three page draft. I didn’t need that explained to me. The 100 pgs submitted for a vote yesterday I didn’t get to read since the server must have been overloaded. But I saw summaries, and still didn’t see what I needed to see… from reasonable ways to determine the toxic assets value to recapitalization. The insurance there was an optional choice.
As far as I can see, all the wrong people are constructing this legislation, and they do so with the premise that the only solution is for the govt to purchase these assets. This is my major problem with the bail out.
BevAnn… no hurry. Frankly neither Aye or I are expecting any pertinent info from you anyway as the problem with the CRA was additional compliance regulations… not deregulation.
I know you said you “don’t buy” this as a financial crises, but I beg to differ with you. This is not the manifestation of political election strategy. Frankly, the American Thinker is giving Congress members to much credit to plot this as a slow, steady path to socialism. Frankly, they are short sighted, quick on the legislative trigger, and inordinately intrusive into multiple subjects they know nothing about. Summary? Too dumb to plan that far out.
This has been a problem in the making for a decade, and many have seen it coming. Both the government and US citizens have been living beyond their means for quite some time. There’s only so long you can get away with that before a reversal has to happen. Well… that time is here.
I also don’t expect you to know where your promissory note lies. You are dealing with your service contractor. It’s unlikely even they know where your promissory note is. However most banks securitize mortgages to free up cash. They are in the money lending business, not the long term landlord business. And, as you said, they move it on pretty quickly as they take most their profits off the top immediately.
And I hope you don’t mind, but I really have to address this statement of yours, as it’s been bugging me as miscommunication of fact.
This isn’t true. First, LTV (loan-to-value) on your house has nothing to do with default. Home values have always, and will always, fluctuate. Part of the big problem with today’s mentality is they always assumed home values would only go up.
You default only when you do not make payments as per your loan contract. If the borrower continues to make payments on his $200K mortgage for a home that has fallen to $120K in value, there is no foreclosure. Hang on to it long enough and it’s likely the home value will again come up to a price that exceeds his mortgage payoff balance…. either by equity appreciation or improvements done to the home to increase it’s value.
What that borrower in that situation cannot do is refinance or sell without bringing money to the closing table. But you must understand, not all the subprimes were ARMs, and in fact there are many subprime fixed mortgages that are doing just fine.
So you are only speaking of a high potential of default *if* the borrower is in an over leveraged home *and* is in an ARM payment today. That’s a lot of caveats there that should be added to your statements.
the reason it is the cheapest plan proposed is that it does not recapitalize the banks nor does it allow the Congress to decide which Banks deserve recap.The issue is not capitalization… it is that much of their capital is tied up in bundles of mortgages that no one knows how to accurately price.If these bundles could be priced with confidence, they could be sold in the market,and cash balances raised.The T plan is to provide a buyer at auctions will give confidence to the market what these mortgage bundles real value in the markets will be.Providing them capital does not unfreeze the market and leaves the govt as part owners of the banks thru their conversion priviledges.
The solution that is the cheapest and quickest is the one that aims directly at the problem.The problem is the lack of confidence in pricing the mortgage bundles.If there was a market for these bundles that buyers and sellers had confidence in, the problem would not be of this status.The key to the T plan is the auction where the T steps in and makes offers to buy when there are no bids.They will know they have bid too high the first time if they get more offers than they have asked for.If they get fewer than they need to raise the price.There is no other way to get accurate prices and no one else has the resources to do this but the T and the F.Once some history for auction prices is laid down, comnpeting bids will show up and the Fed can step back, reducing the cash layout.
Any capital injection in the banking system that does not discover market prices for these bundles is not a direct solution, will rely on the leakage of good things happening to banks to get some of the injected funds to where it is needed, and will cost far more. This is by far the cheapest solution
Let’s take what you say are the basic two problems, John E. The “accurately price” part first.
The only “accurate” price is what a buyer is willing to pay in today’s market. The problem here is the bank’s are quite willing to sell properties on short sales and liquidate, but the feds are trying to avoid this “fire sale”. That’s why they want to buy the toxic crap at above market prices, hold them (hoping the prices go up… idiots) and then turn them.
The inherent problem in this is that the housing prices increased far too rapidly between 1997 and 2000, and after 911 when rates were really cheap, even tripled that fast rate. I have repeatedly posted the housing price increase in graph form. The feds want to maintain the homes at artifically and dangerously high prices. This is not an answer… this is another problem in the making.
If the banks could do the fire sale as normal, still have enough capital to make new loans, the problem would be solved without the government. Yes, housing prices would fall (as they need to), and yes… many will take a financial hit. None of this is avoidable.
This brings us to the first part of your statement that the issue “is not capitalization”. You say that because you accept that the toxic notes are to be purchased at above market prices and not at fire sale prices.
When you liquidate the foreclosures for a fair market price (or mark to market accounting), you most certainly will be left with undercapitalized institutions because they are taking such a financial beating on the fire sale. So recapitalization is most definitely required… which is where the other alternatives (preferred stocks, loans, insurance) etal enter the picture.
Well we ageee to disagree.Just remember this. the T plan is an attempt to create or kick start a market. It will work,Swapping $x of mortgages on your balance sheet for cash does not change your capitalization, it only changes your liquidity You make a number of assumptions ( will certainly etc based on fire sales,most definitely etc . These are opinions.Everyone is entitled to his own opinion , but not to their own facts).It is an auction. If the prices offered are fire sale prices there will not be a sale.You claim to want a free market solution , but prefer plans that give the govt ownership,whereas the T plan buys assets, mortgages, and leaves the govt owners of the mortgages not the companies equity.
You did not read Roubini’s or other economists plans, John E. Nor are you interpreting my comments or posts with any accuracy. Perhaps this is a miscommunication on my part. So I’ll make it simple.
It is you who is advocating that the government purchases overpriced assets and mortgages, and makes the participating entities “financial agents of the government”. You assume that purchasing these will make them liquid, and therefore they need no capitalization. *That* is the T plan.
I can only say that if Paulson himself were offered such a “deal” to purchase overpriced bad notes and hold ’em until they may turn a profit in the future for his personal portfolio, he’d be running for the hills…. But he sure has no qualms in telling the taxpayers to do it… and he and the press present it as the *only* cure.
It is I, along with many others, who advocates the share holders and creditors to purchase insurance and buy preferred stocks, or if cash from govt as a supplement, they are in preferred stocks or in the form of a loan. It is I who sees value in the economists’ alternatives of the RFC, RTC and HOLCs, minimizing the taxpayers costs.
But I will agree that we just plain disagree. Turns out that most the public, and more than a few Congressional members, and a plethora of economists also happen to not agree with you and the T plan. I suggest Congress get to work with alternatives, and fresh ideas… not recycled old ones.
Mata~
Have a quick break btwn appointments, not planning to give you a full response at this time, but do promise to do so, but after reading your post just had to tap out a few words.
Even though I don’t know you well enough to know if I really care or not but for now, your curtness did indeed kinda hurt my feelings. When I ‘m wrong I will admit it and I indeed may need to remove my foot from my mouth in order to clarify my answer to Timothy, but that willl take more time than I have now.
Quickly, my mortgage IS owned by it’s originator, a credit union, a non-profit organization in my state.
They didn’t charge me any of the profitable up front fees. I asked that Q when I applied for the loan. They told me they keep their loans, but underwrite using Fannie Mae guidelines. Just to keep my other foot out of my mouth, I called and reconfirmed a moment ago. Yes, they still own the note on my mortgage. I worked as a mortgage broker in the early ’90’s and know the diff btwn in house and servicing. Usually one receives notice in the mail of the sale, as I have in the past, but his may not be true in all cases.
With all due respect Mata, CRA applies to banks that take deposits. There is a myriad of lenders who lend, only to bundle and sell who aren’t governed by that Act:
I’m running late for my next appointment and I will come back when I have more time, but I leave you with this BusinessWeek article that thankfully helps explain for me. Here is a snippet from this article, and yes the devil is in the details, wish I had more time:
The Community Reinvestment Act, passed in 1977, requires banks to lend in the low-income neighborhoods where they take deposits. Just the idea that a lending crisis created from 2004 to 2007 was caused by a 1977 law is silly. But it’s even more ridiculous when you consider that most subprime loans were made by firms that aren’t subject to the CRA. University of Michigan law professor Michael Barr testified back in February before the House Committee on Financial Services that 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision and another 30% were made by affiliates of banks or thrifts which are not subject to routine supervision or examinations. As former Fed Governor Ned Gramlich said in an August, 2007, speech shortly before he passed away: “In the subprime market where we badly need supervision, a majority of loans are made with very little supervision. It is like a city with a murder law, but no cops on the beat.”
The full article is here:
Community Reinvestment Act had nothing to do with subprime crisis
http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinv.html
I’m still on the fence as to the ’cause’ of all this, as, I have not seen what products are trying to be unloaded on us taxpayers. Not being a gambling person, I would bet it is the bottom of the barrel; what no one wants or can sell.
I agree with your LTV dissection. I didn’t go into detail to keep my post shorter hoping others had some basic knowledge. But my point was, the borrower was ‘stuck’ with his depreciated house unless he took a loss, regardless of the rate, If he wanted to sell.
Also, we are using the term ‘banks’ generically. I suspect a lot of Wall Street’s bundled assets may not have come from banks at all, but other sub-prime lenders who did a lot of ‘creative’, suicidal financing. Banks are much more stringent in their underwriting guidelines one of which being spotless credit at least, ‘back in the day’. When I was in the business, I worked only in sub-prime, the one’s that fell outside major banks guidelines. I used to cold-call banks asking for their loan rejects and got many that way. But back then, it wasn’t the craziness that evolved due to fierce competition of the last 10 years.
More later, have a nice day.
I keep telling myself give up this is a hopeless fight against an infinite number of straw men.Ask yourself, not me because I am gone. Q1 If something is sold at auction,by what definition is it then “overpriced?Compared to what?If an open auction doesn t establish a fair market price , what does?Q2. If a bank ,or a private citizen sells something to the govt,how does the seller become a” financial agent of the governement?”Q3When the banks sell assets off their balance sheets for cash how does that change their capitalization? Q4Perhaps Paulson would not jump at the opportunity to buy such a plan, How do you know that Paulson wouild not, assuming he had the money?, but Warren Buffet has said and Bill Seidman has said, they would jump at it.Q5I am not aware that Paulson has said this is the only way, he has said it is in his view the best way. Where did he say this plan was the only one?Q6 How does the govt buying preferred stock in the banks help the banks create a market for mortgage bond portfolios?Q7The RTC plan was to buy up all the mortgages instantly, then sell them off over a number of years.How could that be cheaper than creating an auction market for the mortgages held.Q7 Bill Seidman has said that an RTC approach( he ran the RTC) could not work because the RTC had all the mortgages dumped on then from insolvent S&Ls , whereas he does not see how an RTC would be able to price the mortgages they would buy from these banks.How would you suggest a mechanism for establishing prices on mortgages bought by a new RTC type vehicle.?
I wrote these originally to try to help explain what was at stake amid the myriad well meaning letters posted which did not seem to understand the issues, and not to indulge in an ego trip or who can score points. It hasnt worked out so good luck and goodbye
BevAnn, we’re not all that far apart on some issues. Didn’t intend to be so “curt”, nor to offend you personally. I could tell you had more than the average bear experience with some lending issues. I also have that training in my background.
Credit unions are not the bulk of the mortgages out there. But had you said credit union originally, I wouldn’t have questioned the note ownership. It’s not that they don’t sell, but they are more likely than others to keep it.
As far as the deregulations of the securitization, loan bundling was not the problem leading to this. Yes, it did add to the lucrative eyeballing for risk management by both the CRA and non-CRA banks. However this is a problem that’s traceable to a combination (not any one on it’s own) of the most fundamental of market basics:
1: CRA compliance regs first stepped up the amount of buyers and risky loans in 1995 and on
2: Higher interest rates at least held housing prices down to slightly less than a dull roar between 1997 and 2000… which was rising because of the flood of new buyers
3: After 911, the below inflation interest rates tripled that flood of new risky buyers. This drove up the housing prices between 2004-2006 at three times the rate of the already fast rise between 1997 and 2000.
4: When the ARMs reset on the risky loans, foreclosures began. House prices started falling, as they needed to, but that meant refinancing was not an option. Only short sales… which of course, contributed to neighborhood values falling.
The deregulation of the bundling was just not an issue. Fact is, the bulk of the loans that are failing are from the regulated bundling by the CRA banks. This is why I didn’t expect anything pertinent that related to the problem.
And yes… I’m using the bank term generically. The MBSs were bought up by many. But minds would boggle further on this all were we to get that specific.