Why *any* Bailout will be an EPIC FAIL!

[Roland99]

No amount of a bailout will "save" Wall Street. They could pass $10 Trillion bailout bill but it won't help. Not one damn bit. Oh sure, it will help short-term stock prices but it will soon come crashing down and hurt like hell because not only would the national debt skyrocket but inflation will soar even faster, too, due to the quick infusion of a massive amount of cash into the economy. ("Chopper" Ben Bernanke's wet dream, though.)

Anyway...this is why it will fail, in as simple of terms as I can explain.

While the problem started with failed/bad home loans, starting off with sub-prime loans to people who might have known better but were largely sold ownership in a home with the impression that housing values will continue to appreciate and they'd be able to refinance in 2-3 years when their ARM reset to a higher interest rate.

Well, the housing bubble popped. That extra equity from appreciation? Never materialized. The existing equity from the purchase of the home? Never existed. So, thousands and thousands of home loans went bad and the homes went into foreclosure and banks started losing a significant amount of money off their bottom line.

This housing price bust then started affecting Alt-A and Jumbo loans. A sizeable percentage of these loans were NO-DOC (no proof of income was required. you say? Exactly!). Also, these Alt-A and Jumbo loans followed a similar premise for the sub-prime loans, the balance (Jumbo..or "balloon" payment) would be due after a few years. People expected house prices to keep climbing so they could refinance after the initial teaser period. Well, house prices fell to the point they couldn't and yet more people were engaging in "jingle mail" (dropping keys off in the mailbox and kissing their house goodbye). And these weren't the schlubs of society. No, these were white-collar families making good money and most having good credit (not anymore).

So, there's your trigger. *BUT* that is NOT what is causing the global credit crunch and the market meltdowns the world over.

Nope...the cause of the problem is that the "assets" (the house equity and cash from downpayments, fees, etc.) were used by financial institutions and the mortgages were sliced and diced into something called a Collateralized Debt Obligation (CDO) or a Mortgage-Backed Security (MBS). These CDOs and MBSs were sold off in pieces called "tranches". A tranch might have 1% of a mortgage or 99% of a mortgage. NO ONE REALLY KNOWS. Why? Because this type of investment was almost completely UNREGULATED and even spun off into credit derivatives and credit default swaps (even riskier types of investments that created more "money" off of nothing but risky debt...insane you say? HELL YEAH IT'S INSANE!) But Wall Street's greed for more and more short-term profits drove the search for inventive ways to make more money. As long as house prices were up or stable, all was well. No one planned on housing prices falling. Why should they? These were the Smartest Guys in the Room, eh?

So, the crux of the problem now is that banks and other lending institutions are having to actually price their assets at market value (mark-to-market) and that means trying to figure out what packages of MBSs/CDOs contain what and how much they're worth. In the meantime, no one wants to buy up MBSs/CDOs because no one knows what they're worth and much of commercial paper is backed by these now illiquid or "toxic" assets.

What's that mean? It means banks aren't lending to each other. It means Joe Public is having problems getting a home equity loan. It means McDonald's is having problems getting financing to upgrade stores. It means small businesses are having problems getting startup loans. It means banks are losing capital (assets being devalued) and that is putting them at risk of failing. Banks move further toward failure when depositors (customers) start withdrawing their money from the banks, further reducing the capital on-hand.

The Bailout Bill was intended to offload those "toxic" assets from the banks making their bottom lines look healthier. HOWEVER, in order to take part in this bailout, they would have to write down the value of their assets and that could actually force some into failure before they could benefit from the billions available from the Bailout Bill. Even then, banks are still reluctant to loan money back and forth despite today's massive $630 billion in dollar swap lines (huge bump up in credit lines) put forth by the Fed for European banks (more European banks are failing...Fortis being the main one discussed).

This is why no matter how much money is offered by a Bailout Bill that it will NOT work. And, as I've said at the start, a massive and fast infusion of cash into the financial system will cause inflation to rise even faster than it is now (already at or above 12%, the REAL rate of inflation that is...not the modified version put forth by the gov't as part of its leading economic indicators).

So, while the House Republicans offered up the lamest of all fucking excuses as to why they voted Nay in larger numbers today (oh stfu, Boner, asshat...your feelings were not hurt by Pelosi's statement), they actually did us a small favor, for now, by not making things worse and forcing the whiny asses on Wall Street expecting to be saved from their criminal and unethical behavior to have to deal with the mess they created.

I've been calling it for years and further gov't intervention (btw, the Republican Party platform on their website adamantly states they flatly do not support gov't intervention in the markets and John McCain earlier this year said would not support throwing money at a solution. heh heh...sure John.)

Anyway...there you have it. The MBSs/CDOs that are comprised of tiny bits of mortgages some small % of are laced with toxic goodness have come back to bite their creators in the ass...and bite them (and the public at large now suffering from inflation, job losses, etc.) hard.

Heckuva job, Wall Street.

[lligrd]

1. As I See It, The Only Way To Save It Was To Boost It Back

to the false boom that we had before. It needs a total correction with FDR like programs put into place. I am rather amazed at how many seem surprised over this. I thought most of us here realized this day was coming.

[Roland99]

2. I've been calling this for almost 4 years and I am by no means an economist.

And, yeah, take $700 billion and create a Cabinet for Works Development and rebuild our roads, bridges, upgrade schools, fund college tuitions, insurance for children.

Invest in AMERICA, not Wall Street. Do as Obama is speaking about...build a strong foundation and the country will thrive. A healthy tree top won't last if the roots are dying.

[TxBlue]

10. A healthy tree top won't last if the roots are dying.

Simple but true.

Need to change bkruptcy laws and provide some mtg help. Alot of mtg. defaults are due to shipping our jobs overseas.

[iiibbb]

39. What the hell is $2333 a person going to buy us

rebuild our roads,
bridges,
upgrade schools,
fund college tuitions,
insurance for children.


All of that huh?

Do you believe in elves?

[REACTIVATED IN CT]

52. That works for me, Roland99 !

We need a bottom up plan.

$700 billion for toxic assets ? Such a deal ! Thanks, but no thanks !

[ixion]

3. excellent summary

best I've read. :applause:

[indepat]

23. Totally agree

:applause:

[Darkhawk32]

4. Time for Wall Street to trim the hedges..............

I think we need to take a few steps back economically to be able to start taking steps forward.

The banks should have rewritten the loans at the current value, taken the principle hit and gain their money back years down the line.

[texastoast]

5. K&R

Excellent.

[dubeskin]

6. Great summary!

Good job! This really helped put things into perspective. I had known that the bailout was a bad plan, but I had never had a whole lot of reason to help back it up, and this definitely helps explain the entire problem and why.

[Lydia Leftcoast]

7. Thank you, that makes sense

and makes me feel better for not having succumbed to the sirens' song of "Buy a house--buy a house..."

[Roland99]

9. A friend of mine gave in to that...he ended up doing "jingle mail", himself

and believe me...he didn't want to.

But repeated flooding (not covered by ins. and susceptibility and prior occurrences not revealed at closing) rendered it unlivable and he can't get a home equity loan to repair it.

[aquart]

48. I'm so sorry. There will be so many more like him, too.

[Roland99]

54. He's come to terms with it...sorta glad he can walk away.

[Vanje]

8. K&R

[2speak]

11. you might want to read this

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=4127627&mesg_id=4128894

[Roland99]

14. Done and replied. And, welcome to DU!

:hi:

[Cronus Protagonist]

12. It's like the economy has dibetes

A large cream cake might end a hypoglycemic episode, but it's just gonna exacerbate the disease in the long run. Perhaps a small hard candy might be a better prescription in the short term while we put in place a treatment plan that includes the prudent health maintenance activities for such a disease.

[magellan]

13. Thank you for taking the time to explain this, I hope everyone reads it

What do you think of Karl Denninger's plan? There's a transcript of it here:

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=4103567&mesg_id=4109804

Someone responded that the new plan (the bailout that failed to pass) increased leverage, but I don't understand whether that's a good or bad review of Denninger's plan; Wiki defines leverage as "In finance, leverage (or gearing) is using given resources in such a way that the potential positive or negative outcome is magnified and/or enhanced."

I'd just like to know if Denninger's ideas are more of the sort of solution we should be going for.

[Roland99]

15. Just have to be careful as to taking over the insolvent ones...

In effect, that's nationalizing and filing a Ch. 11 on every one of them, the way I see it. That won't have a zero-cost to the taxpayer, although it will be a far cry from the $700 billion being begged for now.

I saw a thread earlier here today but didn't get a chance to read it that mentioned forcing the companies into bankruptcy and seeing who survives and who gets sold off but as long as the gov't isn't the one moving in...

But, what private companies are out there with the capital to take on what will be dozens and dozens of large firms?

[magellan]

17. Well, the problem is we still don't know which ones/how many are insolvent

That's one of the major flaws in the bailout bill (and also, one of the things that's helping to keep credit frozen). No one has to turn over their books, there's no transparency, no one knows what the other guy's got or not.

I don't know about forcing a company into bankruptcy; that seems to be what WS is doing on its own. Which begs the question: what's the essential difference between throwing endless bundles of money at an institution that may be insolvent, and forcing it to turn over its books so it can be wound down in an organized way if necessary? Seems to me it's the level of taxpayer involvement, as you say.

Surely that's worth something.

[Roland99]

18. Damned if they do? Damned if they don't? Almost the same position as the Dems.

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=4121178&mesg_id=4121178

[magellan]

40. It doesn't have to be that way

The Dems need to take charge of the situation for once instead of playing footsy with the corporations and dragging themselves to the Repubs, hat in hand, with half-assed compromises.

Throw this bailout in the trash heap where it belongs. Come up with a REAL plan to address the real problem in the financial industry, one that includes at a minimum: regulations and tough, independent oversight; something to deal with default swaps/derivatives; transparency from the institutions who want help so their precise situations can be understood. The cost to the taxpayer can and should be minimized, with an equity stake for whatever contribution is necessary.

Then they get out in front of their plan and explain it in exacting detail to the American people. Over and over. And they don't compromise away the teeth in it. They act like the majority; they're the ones who should be compromised with.

Of course the Repubs will vote against and Bush** will veto it. But then the onus will be squarely on THEM for refusing to act.

If the Dems aren't willing to own the solution 100% then they shouldn't be pushing one.

[Roland99]

41. That's just it. Until the Progressives take charge, we're stuck with feckless leaders.

[johnaries]

16. Excellent summary, but you're forgetting something important.

CONFIDENCE. The bailout isn't a long term solution, true. It is merely a compress to keep us from bleeding to death before we can get the Economy on the operating table. Simply the act of passing a bailout will help restore some confidence, and entice banks/businesses to start lending to each other again. It's not the cash, but the "perception" that it's safe to lend. At least it will slow down the Panic and runs on the banks and the markets.

As Barney Franks pointed out, if Paulson's assertions weren't true before he made them, there were afterwards. A self-fulfilling prophecy. By "saying" the bailout will help, it will slow down the freefall long enough to allow us to address the underlying issues. Hopefully. If Obama gets elected.

[Roland99]

19. But is buying some level of confidence worth opening that barn door?

Once it's open, it will spread to buying credit card debt, car loans, student loans, etc. And a complicit Congress will run this debt up to over $2 trillion. And then what?

[johnaries]

28. I sincerely doubt that. The bill has limitations built in.

This is an emergency bill, one that even the strongest supporters don't like but feel necessary. It won't expand any further.

[Captiosus]

38. Limitations, my arse.

You mean "limitations" like this one?

(9) TROUBLED ASSETS.—The term ‘‘troubled assets’’ means -
(B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.

Take specific care to note that Congress, in this passage, has absolutely nothing to do with it other than to get an obligatory interoffice mail from the Secretary of the Treasury saying "hey, we've decided to add consumer debts to the list of 'troubled assets'".

That's not a limitation. It's an extension of a blank check.
Congress left the determination of further funds up to the President.
Congress left the determination of troubled assets up to the Secretary of the Treasury.

The limitations in this bill were non-existent. The oversight had no teeth, prescribed no way to stop the flow of funds beyond drafting a NEW resolution, and merely existed to get reports, not actually prevent any kind of fraud from happening (a la Iraq and Katrina funding that is unaccounted for).

[Roland99]

20. Oh, and the Bailout Bill also does *nothing* for accountability!

That's another key factor. Just letting the criminals go is not part of the best solution. Shouldn't be part of ANY solution.

[johnaries]

29. That is another battle. For another day.

The Dems wanted to add some accountability, but had to strip it out in order to try and get it passed quickly. The "de-regulation" gang are still going strong, even though the proof is right in front of their eyes.

There are many reforms that must be implemented, but those can wait until Obama is President. These emergency measures can't wait.

edit: PS, I appreciate being able to discuss this reasonably and intelligently with you, without all the "rage" in so many other threads. Thank you.

[Roland99]

30. But these "emergency" measures *can* wait, imo (and others'). Markets are up nearly 250pts now.

Recovered nearly 1/3 of the value lost yesterday.

It was a manufactured emergency and, to me, the Repukes' failure to pass it because they were "hurt" by Pelosi's statement is even more proof that an emergency bailout bill is not needed.

To me, the most logical first step would be to unwind the MBSs/CDOs and isolate the "toxic" mortgages and toss them into a bucket together and write them down and leave the bright, shiny mortgages all fresh and rosy and, voila! Instant solvency and re-capitalization!



And, yeah, pleasant discourse is always appreciated! :hi:

[johnaries]

36. True, but as you pointed out in your OP it's not really about

the markets. It's really about the commercial papers. One thing you didn't mention is that for the first time the market "broke the buck". The short term lending rates are (for them) outrageously high. If the market breaks the buck again, it could bring the entire economy to a halt because many businesses won't be able to do business.

And remember, the Repukes that voted against it are the same ones that think the problem was caused by "too much regulation".

Yes the MBSs/CDOs and the CDSs need to be "fixed" and regulated. But I think that's the second step, not the first. IMHO, anyway.

[Roland99]

47. Isn't that why the Fed opened the credit lines yesterday to make it easier to borrow dollars?

And that had no effect.

I don't think credit is really the problem. They're just afraid of letting go of what they have. It's like Schroedinger's Cat. They don't want to peek in the box and find out the cat is really dead. They want to pretend it's still alive (and dead).

[Hydra]

50. The confidence isn't being restored

The world outside wants nothing to do with our money if we push inflation higher with this, and they've told us so.

Every voodoo economist on DU tells me how important those investments are...but now we throw that line of thought in the trash in favor of giving Paulson money to give to his friends? I'm not getting that, still.

[sybylla]

21. Thank you for this.

Having worked on the banking side of the financial world two decades ago, I felt something was missing from the discussion of the bailout package.

You've filled that gap admirably.

K & R!

[Roland99]

22. Thanks to all for the kind words of support. Thought it would help...

And it helped me, too, in writing it all out. If someone like me can see this train wreck coming from miles away, it makes me not only not support a bailout but I will ral against politician that doesn't first address the accountability issue. The Repukes' stunt yesterday is proof the bailout is not needed, esp. immediately.

[indepat]

24. All this makes me glad to have sold WB, NCC, BA, ML and a few others more than

a year ago and to have never considered buying C. I too saw this coming ages ago but, like a dope, failed to comprehend the sheer scope and magnitude of the colossal greed, fraud, and ineptitude. :D

[JohnyCanuck]

25. Jim Kunstler's latest blog entry touches on some of this material.

Only he foresees another "tsunami" building behind this current crisis, i.e. Peak Oil and an energy crunch. As Kunstler has pointed out in other posts on his blogs, after the 1930s depression the US had lots of cheap and easily available energy (it was a net oil exporter) and a good transportation infrastructure (i.e. railways) to assist in rebuilding the economy. Now the situation is the opposite, energy is becoming more and more expensive and increasingly difficult to obtain while the US is now a net oil importer (and in a big way) as its own production peaked and started to decline in the early 1970s.

What we're seeing in this fiasco, among other things, is a lesson in the diminishing returns of technology. This is a train wreck of investment vehicles so complex that they could only be created with the aid of computers. The result is that hardly anyone -- perhaps even nobody in or out of Wall Street -- really understands what they represent. In fact, this alphabet soup of engineered securities -- CDOs, CDSs, MBSs, SIVs, etc -- was cooked up from a recipe of Ponzi algorithms. They were designed to be mathematically indecipherable, except by computers, in an alternative universe of model-making that bore only a superficial relation to the real world. That was their dirty secret. And the dirty secret of the Great Bail-out is that, in the real world, we will never be able to discover the actual trading value of these things at any number above zero. This is why they are called "toxic."

SNIP

The question, of course, is what happens now, after this morning's scheduled vote on the Great Bail-out package. Last night, I would have predicted a brief bounce in the stock markets of a week-or-so duration. This morning, at eight o'clock, I'm not so sure of that anymore, but I suppose we shall see. Beyond a week-or-so, I expect the Great Bail-out to fail rather quickly in its main mission: to stabilize the banking system and calm the markets. The process of negotiating the package has given off an odor something like medieval scholasticism -- a method much like the creation of Ponzi finance itself, in which layers of tortured interpolation rendered theological concepts so abstruse that all the prayer of all the monks and nuns ever conceived within the walls of the Vatican would not avail to reveal their mysteries. The object, of course, was to reinforce the essential mystery of religion, just as the object in Ponzi finance was to reinforce the mystery of engineered securities.

What the mainstream is truly missing here en masse is that another tsunami is building right behind the finance fiasco, and that it will render moot the whole reeking cargo of schemes and wishes that comprises the Great Bail-out. I am speaking of the global oil problem. In fact, the problems in banking and money currently roaring in the center ring of the world circus, can be described categorically as a product of the oil problem -- since oil is the primary resource of industrial economies and therefore the motive force behind our ability to generate "wealth." Without reliable and ever-growing supplies of oil, there is no industrial growth, and without industrial growth things like capital investment instruments lose their legitimacy. That is why the Frankenstein family of Ponzi securities was invented in the first place -- to compensate for the demise of industrial growth by creating wealth out of... nothing!

The looming oil problem entails a swirl of factors that will aggravate and accelerate our social, economic, and political struggles. These factors will mutually reinforce the instabilities that they set into motion. For instance, the new oil nationalism is undermining the traditional operation of oil markets as we've known them since the mid-20th century. In turn, oil nationalism will aggravate the oil export crisis, which will starve the oil importers -- the USA being the chief victim. Finally, there is the remorseless base-line condition of Peak Oil itself, meaning that we are at point where world oil demand permanently outstrips world oil supply no matter if the USA falls on its ass economically or not. What remains beyond this is a desperate contest among the oil importers -- America, Europe, China, Japan, India -- for control of the world's remaining oil resources.

http://jameshowardkunstler.typepad.com/clusterfuck_nation/2008/09/the-pnzi-plus-plan.html

[Roland99]

26. Heard last night if oil hits $85 or below, OPEC will likely make moves to stop the fall.

Even though that's still about $25/bbl of inflated crap.


But, hey, we import a lot from Canada...we invaded the wrong country!!

[JohnyCanuck]

55. Peak oilers predicted peak oil will lead to increasing volatility in oil prices.

The Peak Oilers predicted that one sign of impending peak oil would be increasing volatility in oil price. We do seem to be seeing that these days. If Matt Simmons is right any drop in prices we are seeing now will only be temporary.

In his typically analytical fashion, Simmons went hunting for data. He found it in the form of hundreds of technical papers submitted by Saudi oil geologists to the Society of Petroleum Engineers over the past 50 years. Simmons spent the month of August 2003 sitting on his porch in Maine and grinding his way through the minutiae of technical accounts of, for instance, reservoir pressure and water-cut percentages, trying to piece together the challenges that the Saudi geologists had encountered in managing their precious oilfields. In the end, his conclusion was clear. "I finished reading the last paper on a Sunday afternoon," says Simmons, "and I sat back and I thought, Holy crap, this is unbelievable. I've just discovered the biggest energy illusion ever in the world. We're in big trouble. I'm going to write a book."

And so he did. But writing the book didn't exhaust his passion. Today he is more convinced than ever that we've reached peak oil. If he's right, current world oil production- 86 million barrels a day- is about as high as we're going to go.

Of course, if demand goes up but supply doesn't, prices are apt to go through the roof. And unlike global oil production, global oil demand doesn't appear to be anywhere near a peak. Both the U.S. government's Energy Information Association and the independent International Energy Agency, based in Paris, estimate that worldwide demand will be more than 115 million barrels a day by 2030.

While demand growth in the United States has slowed recently due to higher prices, the EIA projects that China and India will more than pick up the slack. And the IEA recently warned that high prices won't slow demand growth in emerging economies. If demand wants to go north of 100 million barrels a day and supply can't break 90 million (or drops below 80 million, as Simmons believes will happen within five years), it will be a price squeeze felt around the world. The peak-oil crowd will be able to declare victory - but nobody will be celebrating.

snip

No one disputes that oil production will top out some day. It is, after all, a finite resource. The argument is about how far off the peak is. As Simmons and others point out, many of the world's largest oilfields - Prudhoe Bay, the North Sea - have already gone into decline. The most optimistic estimate for the average depletion rate of the world's currently producing oilfields is between 4% and 5% annually, or about four million barrels per day at our current rate of production. That means that each year we must find enough new oil to first replace those four million barrels of lost daily production before we even add enough to meet new demand. This is all the more worrisome because world oil discovery of new reserves has been slowing since the mid-20th century.

http://money.cnn.com/2008/09/15/news/economy/500dollaroil_okeefe.fortune/index.htm?postversion=2008092213

[Dr.Phool]

27. Kick & Rec!

[HamdenRice]

31. So much in this post makes absolutely no sense whatsoever

There is a lot wrong with this analysis, but hopefully we can put to bed at least two myths:

"the mortgages were sliced and diced into something called a Collateralized Debt Obligation (CDO) or a Mortgage-Backed Security (MBS). These CDOs and MBSs were sold off in pieces called "tranches". A tranch might have 1% of a mortgage or 99% of a mortgage. NO ONE REALLY KNOWS. "

First of all, cdo's and mbs are completely different things. cdo's are much worse, and I'll be posting something about the difference between them.

The crazier myth is that "no one really knows." Take a look at this page. This is the Prospectus for a Bear Stearns mbs that was filed with the SEC:

http://www.secinfo.com/d1zj61.ue8.htm

Scroll down to charts like this -- sorry it doesn't remain formatted on being copy/pasted, so check out the original <continue reading below chart>

December 31, 2003 December 31, 2004 December 31, 2005 December 31, 2006
____________________________________________________________________________________________________________________________________
TotalPortfolio Total Portfolio Total Portfolio Total Portfolio
Loan Type Number of Loans Number of Loans Number of Loans Number of Loans
____________________________________________________________________________________________________________________________________
Alt-A ARM...... 12,268 $3,779,319,393.84 44,821 $11,002,497,283.49 73,638 $19,087,119,981.75 61,738 $18,656,292,603.55
Alt-A Fixed.... 15,907 3,638,653,583.24 15,344 4,005,790,504.28 17,294 3,781,150,218.13 11,514 2,752,302,975.51
HELOC.......... - - - - 9,309 509,391,438.93 18,730 1,280,801,433.05
Prime ARM...... 16,279 7,179,048,567.39 30,311 11,852,710,960.78 27,384 13,280,407,388.92 7,050 3,481,137,519.89
Prime Fixed.... 2,388 1,087,197,396.83 1,035 509,991,605.86 3,526 1,307,685,538.44 6,268 1,313,449,131,.86
Prime Short Duration
ARM (incl. Neg-Am
ARM)........... 7,089 2,054,140,083.91 23,326 7,033,626,375.35 38,819 14,096,175,420.37 61,973 23,396,979,620.82
Reperforming... 2,800 247,101,330.36 2,802 311,862,677.46 2,877 271,051,465.95 1,084 115,127,847.83
Seconds........ - - 14,842 659,832,093.32 114,899 5,609,656,263.12 116,576 6,697,082,133.33
SubPrime....... 29,303 2,898,565,285.44 98,426 13,051,338,552.19 101,156 16,546,152,274.44 60,796 11,394,775,124.07
_______________________________________________________________________________________________________________
Totals......... 86,034 $20,884,025,641.01 230,907 $48,427,650,052.73 388,902 $74,488,789,990.05 345,729 $69,087,948,389.91
_______________________________________________________________________________________________________________

<end chart>

This is stuff available on line about this series.

This one filing has dozens of spread sheets like this that explain exactly what's in this mbs and how all the loans are peforming. The trustee has even more detailed spread sheets, down to the level of how each individual loan is performing and who the homeowner is.

The problem isn't that no one can know what it's worth; it's that no institutions have the time to pour through the online prospectuses, registration statements, and exhibits, or time to call up the trustee for even more detailed information, before trading an mbs to settle an inter-bank debt.

But a federal agency that had a group of dedicated accountants and lawyers and econ phds could accurately price all this stuff before buying it, and make money on the deal.
.

[Roland99]

32. Thank you for the clarification. I'm obviously not trained in economics...just self-taught.

But, imo, you demonstrated exactly why no one does know what these are worth. No one is taking the time to go through it to find out.

And why not?

Wouldn't doing that solve the problem by delineating what mortgages are "toxic" so they can be separated and tossed aside?

[HamdenRice]

33. Bingo, but -- get ready for it -- this is why I think a bailout could work

Let's say you are a regional bank and at the end of the day, after tallying up settlement requirements, you owe a bank in the next town $500,000. You owe Citibank in New York $50,000. Chase owes you $45,000. The list goes on and on.

In the past, you've always transfered mbs to settle up. The mbs were treated like money. They all had identical ratings -- triple A, which they had to have, for you, a bank, to own them -- so you treated them all exactly the same. You traded them at exactly face value. You never looked at the prospectus after the first time you read it when you purchased them.

Now what do you do? You have 4 hours to settle. You never even made a distinction between mbs before. Who's going to go through hundreds of prospectuses of mbs you are offering and that are being offered to you?

Now compare that to the Treasury department. They make an offer: their geniuses sit down for a day, and analyze one issue/tranche. They use models for defaults from Fannie/Freddie, Treasury, FDIC, SEC, Labor Statistics, and on and on. They realize that an mbs series being offered for 25 cents on the dollar is worth 80 cents on the dollar. In fact, the Bear Stearns security I linked to is some of the worst dogshit ever offered, and it's paying roughly 97 cents on the dollar (but is likely to go down in value as more homeowners default), but no one will buy it.

So you buy it for 30 cents, unbundle it, turn it around and sell it for 80-98 cents on the dollar.

Congratulations taxpayer! You've just made 60 cents on a 30 cent investment!

Moreover, you got FREE stock in the bank that sold this stuff to you and as a result of the sale, it's stock rose 80%.

Keep doing this and we pay for universal health care in about a year.

If this is done right, the federal government will be like a gambler sitting down at the black jack table in a casino -- but a gambler that runs the state gaming authority and sets the rules, a gambler that owns the casino, a gambler that sets the odds, a gambler that knows ahead of time the order of the cards in the deck, and a gambler that can tell the card dealer what cards to deal to him.

It's a fucking no brainer.

[Roland99]

34. That does sound like a logical alternative. HOWEVER, would that ever see the light of day?

From what I understand, Treasury is paying "retail" for these assets, not pennies on the dollar. Break-even is the best possible alternative but, would it really be break-even given the massive amount of interest on this new debt that would be incurred in the meantime?

[HamdenRice]

35. No one knows Treasury's model and that's a problem

Moreover, rather than taking these apart and putting them back together, they are going to do "buy and hold," which is riskier.

I'm starting a blog about this and maybe it will catapault the propoganda. My first entries should be up tonight at:

hamdenrice.blogspot.com

[Roland99]

37. Thanks! I will check that out tonight!

[Captiosus]

42. You're right that no one knows the Treasury's model but

look at the language of the bill.

1 (e) PREVENTING UNJUST ENRICHMENT.—In making
2 purchases under the authority of this Act, the Secretary
3 shall take such steps as may be necessary to prevent un
4 just enrichment of financial institutions participating in
5 a program established under this section, including by pre
6 venting the resale of a troubled asset to the Secretary at
7 a higher price than what the seller paid to purchase the
8 asset.

The only thing this passage did was make it so banks couldn't get higher than retail value for their troubled assets. However, the byproduct of spelling it out in such a fashion is that banks will ask for an amount equal to or only slightly below retail value. Not pennies on the dollar.

If the Treasury tells banks they have to write down their illiquid debt to participate in the bailout and then only offers pennies on the dollar, I don't expect many banks to take the bailout. Then we've solved what, exactly? Banks will still be sitting on a ton of toxic loans and will be decrying government to give them "market value" for all their bad debts and we're all right back here at square one.

[Barack_America]

44. Thanks. I think you just answered the question I was about to ask.

Which was why the assets had to be "written down" as the OP claimed.

[ProfessorGAC]

43. I Only Disagree In Part

Look at the liquidity values of the large cap companies. The money is there. The big caps are pushing the bail-out so they're OPTING out of lending to other institutions to create upward pressure on gov't.

The crunch is "semi" artificial. There is a capital crunch, but no liquidity or credit crunch. If they wanted to lend the money and take their chances on the survival of the banks and lenders with whom they have investments, they could do it.

They are trying to pressure from the SBO's upward, the bail-out to move forward so they can laterally distribute their liquidity without increasing their capital risk.
The Professor

[appal_jack]

45. K&R - One of the most intelligent discussions of this issue yet

I really appreciate Roland's effort in the OP, and also much of the intelligent discussion from other DU'ers that has followed in this thread. It is certainly raising my own understanding of the issue.

While I am certainly no expert on the issue, I knew three things before reaading this:

1) The urgency and rush to pass the bailout was classic scare-mongering and Shock Doctrine
2) The bailout as written would have further bankrupted America, without improving the lives of its citizens one whit.
3) BushCo is lying (this particular fact can be taken as a given no matter what the situation).

I hope that Roland's, Hamden's and others' insights make for a better plan from here on out...

-app

edit for spelling, cuz my Mac likes to bounce keys...

[Karenina]

51. Welcome to DU!

1) check
2) check
3) check

:toast:

[appal_jack]

46. oops - dupe. n/t

[Dr.Phool]

49. Kick!

[pberq]

53. Great explanation! nt