The Bailout

I’ll try and squish together some time to write a semi-coherent overview of the proposed $700b bailout of the financial industry, but first I just wanted to dispel a nice piece of spin that’s been accompanying it.

Namely, that the taxpayers are actually going to make money off this deal. The thinking here is that all these mortgage securities are really worth some money, and the only reason banks are needing to sell them off is that they are illiquid, not insolvent. Given more time, the banks would sell these off themselves, and make a lot of green.

Well, no. The securities backed by these toxic sub-prime mortgages are certainly not worth face value, and without unraveling the securities and tracing back to the people and properties actually involved, it’s going to be hard to tell what they are actually worth.

This is sort of the situation in a nutshell.

A guy with a $30k annual income was sold a house worth $150k for $300k while the market was insane. He was given a low payment on a teaser loan for 5 years. He was told that the house would appreciate so much in those 5 years that he’d be able to refinance and keep the same payment, or maybe even lower!

The bank that sold him this loan, packaged it up with a lot of other loans and sold it to someone else.

Well, whoops! Housing prices crashed.

So this guy doesn’t get to refinance, because his house is now worth substantially less than what he paid for it. So he’s going to get foreclosed on.

Along with millions of others like him. As all these foreclosed houses show up on the market, housing prices will continue to fall.

Ultimately, these mortgage backed securities are tied to the price of housing, because no one can pay these mortgages. We know for sure the houses aren’t worth what’s on the mortgage. But we don’t know what they will sell for today, or in the next two years as we sort out the mess.

The big question is: Will the government be buying these securities at a value that exceeds their actual worth? The proposal has no stipulation for the government to pay fair market price, and there’s a good chance that the plan is to pay a premium to stop asset sale offs that are causing a downward spiral in pricing.

Needless to say, there’s no real expectation that the government will come out ahead in this deal. These securities are not undervalued.

But above and beyond that, from what I’ve read, this really won’t solve the problem of all of these banks being undercapitalized, and over-extended.

here’s the proposal.

You’ll notice a couple of things: 1. No obligation to follow federal contracting law. No bid contracts! 2. Absolutely no review by any federal agency or court 3. Includes commercial mortgages, not just residential – want to wipe out your commercial bad debt too? Just chuck it in.

This is a really bad plan. Having no oversight is just a recipe for disaster.

So not only is there not a clear understanding about how this will help the financial markets, there’s also essentially zero oversight into how it’s actually carried out. This is a bad, bad deal for the American people.

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