Check credit market to see if bailout works (valuationcrisis)

SF Chronicle ^ | 10/05/08 | Kathleen Pender

[TigerLikesRooster]

Check credit market to see if bailout works

Kathleen Pender

Sunday, October 5, 2008

Now that Congress has passed the bailout bill, how and when will we know if it is working?

Before we can answer those questions, first we have to answer this: What problem was this bailout trying to solve?

Although lawmakers tried to rebrand it an "economic rescue bill," experts say its real purpose is to create a more active and transparent market for mortgage-related securities and thereby help restore confidence in the financial system. It won't restore the balance in your 401(k) plan in short order or guarantee you won't get laid off.

To see whether it's working, you'll have to look not at familiar stock market barometers, but at more obscure credit-market indicators such as Treasury bill yields, the London Interbank Offer Rate, or Libor, and the difference between them.

The main problem plaguing the system now is that nobody knows how much mortgage-related securities are worth. These securities are excruciatingly complex, no two are alike and the few that have traded hands recently have done so under duress and at fire-sale prices.

People who own these securities think they're worth more than fire-sale values but potential buyers won't pay more because they are not sure whether the mortgages will be paid off and are afraid they might get stuck with them. Hardly anybody really understands them; most investors simply relied on ratings, which turned out to be way too generous. As a result, the market for them has ground to a halt.

[TigerLikesRooster]

During the boom, nobody cared a whole lot about what particular securities are worth. Price was keep rising anyway. Now that the market tanked, everybody wants to know how much their stuffs are worth at the moment. Nobody has any idea. The market is covered with fog thicker than Beijing smog.

All those complicated investment tecniques really obfuscated the transparent valuation of seucrities and assets, spawning valuation crisis.

[TigerLikesRooster]

Ping!

[BGHater]

http://www.portfolio.com/views/columns/wall-street/2007/10/15/Bear-Stearns-Troubles

Decent old article[Nov 07] on the Investment banks and their risk with leverage. Can't post on FR, but worth a read.

[TigerLikesRooster]

Thanks.

[Positive]

"All those complicated investment tecniques really obfuscated the transparent valuation of seucrities and assets, spawning valuation crisis. "

I can remember when "securitized mortgage pools" like Gennie Maes were priced on a three tier basis.

- Yield (percentage return to maturity)
- Pay Off Rate (some mortgages are paid off faster than others...a demographics thing.... so some investors got their principle back before they earned much interest on it)
- Quality (higher default rates in some pools versus others...like Salt Lake City versus Detroit)

The thing was we expected them all to "pay," it was just a question of what the yield to maturity was expected to be.

Now add to those variables, a nation wide real estate value depression and the use of enormous sums of these "securities" as bank capitalization and we have a grenade without the pin in our economic hands.

[diverteach]

I’ll let you know tomorrow after I see the bank as I’m trying to buy my first house. (fingers crossed)

[org.whodat]

I hope you offered about 50% of it’s asking price.

[Former Proud Canadian]

mark

[pointsal]

QUESTION: How much of a down-payment is the bank demanding...percentage please.

[diverteach]

“QUESTION: How much of a down-payment is the bank demanding...percentage please.”

Not really sure yet as I’ve been fence sitting for a while waiting to see how this current credit situation plays out.

I’m looking to finally buy the house I’ve been renting for the last 9 years.

It peaked around $250,000 and is now down to $100,000 and I don’t think it’ll go down much further if at all.

But I’m ready to put down $10K and hopefully on a VA loan it will be plenty.