Posted on 09/20/2008 9:46:19 AM PDT by koraz
“The RTC’s cost for handling those failures was estimated at December 31, 1995, to be $87.5 billion, or about 22 percent of the assets at time of failure.” (page 25)
“The $87.5 billion in costs was almost twice the initial $50.1 billion FIRREA appropriation, but it was substantially less than the high end of the range that the U.S. Treasury predicted at the peak of the cycle in June 1991 of close to $130 billion in 1989 present value costs or $160 billion in absolute dollars.” (page 25)
“Another factor influencing the ultimate resolution costs for the RTC was inadequate or delayed funding. As previously discussed in this chapter, interruption of funding occurred before passage of each of the three funding bills.”
“Because of the large percentage of nonperforming assets, those institutions’ liquidity needs were funded through deposit liabilities. If those institutions had been resolved promptly, carrying costs would have been reduced because assets retained by the RTC were funded at RTC borrowing rates rather than at the higher insured deposit rates.”
(Excerpt) Read more at fdic.gov ...
Ok. So answer my question. What is the “correct” value of the $100,000 house (in the aggregate)??
It is understood that all real estate is local so your answer could be by region and then a weighted average could be determined.
Without facts, I still find it hard to believe that the weighted average value would be less than $35,000 (the current market value that is being assigned). If you have facts to show be otherwise, I would be love to see them!!
One other point. Your valuation of $75/85 from $100/150 represents a decline in market values of 25% to 50%.
At a 35% valuation, the implied decline is 65%, well above your estimate. Based on your estimates (which I have no opinion if they are correct since I see no facts backing it up), the government would realize a gain by taking on these properties!!
You think it’s going to be as high as 35%, I heard 20%- or will it vary from case to case?
The true way to find out the value is to get the government out of the way and let supply and demand work.
“The only panic I saw was the thieves about to be caught short and go broke.”
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Well if history suggests anything it is that they will also go free, but I’d love to see some of them do serious prison time.
“You think it’s going to be as high as 35%, I heard 20%- or will it vary from case to case?”
That is the correct question to be asking. I do not know the answer. Obviously, the lower the price the government buys these for, the greater the potential for a profit.
I was using the 35% since I heard it being tossed around a lot on CNBC yesterday. Your question forced me to “back up my position.” As shown in the attached article, Merrill Lynch wrote these assets down to 22 cents on the dollar. The article notes that:
“It was a very aggressive markdown,” said Chris Henson, a portfolio manager at MFC Global Investment Management in Toronto. “The question is, is that now the clearing price for anyone who has CDOs?”
http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080729/REG/415376531
It sounds like your 20% is based on the Merrill Lynch write-down.
In my opinion, those structuring RTCII should push for the lowest price possible (which might be 20%). I find it hard to believe that, in the aggregate, this is a proper valuation. It would mean houses sold for $100,000 are now only worth $20,000, But if the government offered 20% and allowed other bidders to buy these mortgages at higher prices it would offer protection for the shareholders. Or course, they need to be aware of adverse selection (paying 20 cents for securities worth no value). The key here is that by providing a mark, it stops the free fall and other bidders can enter the market if they think the government is getting a deal.
Along the same lines, did you notice that the shareholders of AIG are looking for a way to raise funds to buy back the $80 billion loan so that the government does not get the equity in that company? Clearly these shareholders think there is value there.
But if the government offered 20% and allowed other bidders to buy these mortgages at higher prices it would offer protection for the shareholders.
Sorry ... I meant to say “taxpayers” not “shareholders.”
Yes, it is.
like most things in DC, it became a political football, and it's likely near impossible to put this humpty dumpty together again in any kind of provable way with a accounting report since government reports are all political.
I have watched this over the years because I had actually had money in one of the S&Ls and I was curious to see how much the government would gain, because I knew that they would, if they held the assets long enough for the effect of the decline to reverse. I also lost a house then and I knew that the house not only regained it's value, but it tripled in price within 4 years.
I have been privileged to watch a few round table discussions of this subject where some of the various managers of the RTC talked about how proud they were, given the results of the disposition of the assets when it was all over, and none of their views or numbers were in the government sponsored reports on the subject.
Add to this the sudden budget surplus in 2000/2001 time frames, and you can start connecting dots, and add to this further the recent statements of some like Larry Kudlow who had the head of the old RTC on his show (a democrat)who essentially said they made a profit, and you begin to understand how this would be a bad thing to become public verifiable knowledge after a stream of Democrat operatives tried to destroy the credibility of the RTC that was run by democrats.
Then you look at the Republicans who also deny a profit for the RTC, because if they acknowledge it, they damage their own credibility during the so called Contract for America episode that they claim caused a surplus for the first time in decades.
We are essentially pawns in a political game with many dimensions, and that is why I so despise the populism of the McCain campaign, as it is as phony as a three dollar bill.
You better believe there is!
I bought some shares yesterday. It will all come out in the wash before too long. Just don't know low long it will be before the rating agencies take them off credit watch and return their AAA rating.
You are talking about the original mortgage, which is value based on property appraisals and ability to pay. Since both are drasically reduced, the mortgage is worthless in some ways, and at best it indicates futher costs associated with the reselling at lower prices and damage repairs.
But that's not the worst thing. The worst securities leveraged these loans as much as 40-1, and were designed to spread the risk of the loan out into the markets. These securities are based on packages of these loans, and you can't tell what loans, what area of the country, much less the address, or whether it is being paid, and they are the real problem. The current value is around 20-50 cents on the dollar, and the government will be paying around that price, depending on known data and writedowns thusfar. It is these securities that could be worth their face value or more in ten years or less, but some of them expire in 3-5, like bonds so there is a lot of unknowns here as to potential losses which could be 0-100%.
The Democrats start with Barney Frank and Chris Dodd chairs of the respective banking committees.. John Kerry was also in there pimping for no money down loans ... The list goes on. Any big time liberal voted for the crap that caused the meltdown.
I don’t see any panic from my end. I am not sure a government solution is the answer either. The solution is to prove who did it, and punish them. Then we can fix it. No punishment, no solution.
Remember Enron? World Com?
Hey Obama wants to give another $850 billion to the global poverty pit ... The end of liberalism knows no bounds, until you run out of money.
Yes, I understand how difficult it is to get behind all this. As I see it, there are four figures that we need to ferret out.
1. The market value of the property used as collateral(at the loan origination, now and a “non-panic market estimate).
2. The face amount of the mortgages and LTV along with estimated default rates.
3. The face amount of the securities with detail of what part of the mortgages cash flow was included.
4. The amount of write-downs taken to date.
I agree that the leverage allowed asset values to be inflated and many individual securities may not be worth anything. But wasn’t the leverage in the entities that bought these securities and not in the securities itself? I may be wrong but I can’t see how an individual security could have leverage in it.
Additionally, as there is real estate at the bottom, there has to be some value there. While it would be a huge exercise, it would not be impossibe to create a database with all of this information in it. In fact, each originating entity should have this for their issued securities. The database would be an accumlation of these files. This is not an easy exercise but it needs to be done to unwind these securities.
Individually I agree that the value could range from 0-100%. What is the aggregate value? Is is possible that it is less than 20%? I am not yet convinced about that.
AIG, on the other hand, is a sound company with sound business ethics, yet is became troubled due to the downgrades in it's credit ratings linked to a unregulated portion of the business whole linked to housing..
There is not a single insurance entity on the planet that could survive a credit rating downgrade with the credit markets seized up and in turmoil. Not a single one!
The downgrades essentially triggered a massive cash need to bolster the regulated parts of the business and the cash was unavailable without time to find it, so bankruptcy was the only alternative.
The government had to intercede, or the credit fire would have spread to everything, as it did in 1929, only this time it would be global in effect.
You, me, and all our families a friends should be very thank full that they acted, and very concerned that they will be successful in stopping this before it destroys the global economy and devastates the U.S. and everything you depend on for food, shelter, and stability.
So, as a result, the market stopped, and the sales and exchange of the securities stopped, bringing their market value to effectively zero.
This is what we have. Why the Fed must remove these things from the system somehow, and why failure is not a option.
I assume you think the $25 million paid by Raines for cooking the Fannie Mae books so he and others could get bonuses doesn’t count.
AIG’s management should get the award for stupidity. Were they the only ones on the planet who didn’t know a stinking pile of mortgages when they saw one? I don’t call that exactly sound business practices.
Gee, I thought it was management who was responsible for insuring the investments made were sound. Maybe I am missing something.
Just like you and I are responsible for buying houses that you can afford to pay for.
If you don’t see any panic from your end you may be too far down the food chain.
Did you notice the 900 point drop in the market at the beginning of the week?
Have you noticed that there are been 12 bank failures so far in 2008?
http://www.fdic.gov/bank/individual/failed/banklist.html
Yours could be next.
Were you aware that on Thursday there was a total meltdown in the money market?
“Money-market funds have been devastated by the decline, as data from iMoneyNet shows that nearly $90 billion of net investor cash was pulled out of money-market funds on Wednesday.”
While these might not affect you now, there is a trickle down effect that will get you no matter what. Think about a simple situation where you own a home that is part of a homeowners association. Let’s say there are 200 homes in the association. You pay $100 dues based on dividing $20,000 cost spread amongst 200 homes. If 10% of these homes go into default, this same $20,000 now needed to be spread amongst 180 homes. Bingo, your fees are now $111! And you were doing nothing but minding your own business.
You may not like it but would livelihood is intermingled with all the jerks out there!
What you don’t understand is that AIG held the same securities that every other insurance company held. It was just the first to be attacted by the shorts. If AIG went down, EVERY OTHER insurer would have gone as well!
There are other companies like MBIA and others doing likewise and that is why they are in trouble, but when their credit ratings dropped, it did not affect the rest of their business models because they don't sell life and casualty insurances in regulated states and 140 countries.
These regulations require the seller to back up their book with a certain cash percentage to guarantee against losses. This percentage is based directly on credit worthiness by ratings agencies, and they did nothing wrong except to have not seen what was going to happen with the mortgages.
If anyone did, they certainly did nothing about it, and you really can't hold AIG responsible.
I am not too happy about how slow their board was to react to the credit warnings, but then I don't know what they tried to do or what they could not get done as insurance companies are very closed mouth about their internal stuff, and for a very good reason. Insurance is sold on trust, and they were protecting that trust for good reason.
Having said that, I seriously doubt that the board, or any of the upper management will escape the housecleaning as a result of the near disaster.
your analysis is flawed.
we have a history to guide us. You also don’t realize that many of these items ARE collateralized.
Also the “buy” of aig was at the bottom of the barrel.
we should be thinking along the lines of the chrysler bailout. a cost benefit analysis. what are we buying for the dollar we are spending.
We should not be thinking like those executives who did the ford pinto analysis which concuded it was cheeper to let people die rather than fix the problem.
“100,000 dollar mortgage, and selling 2,000,000 dollars worth of derivative securities on it”
This is what I really would like to understand. I see how the hedge funds could leverage up but I don’t see how a leveraged security could be issued.
As I understood it, they would take a pool of mortgages, map out the estimated cash flows and then create securities that had a portion of these cash flows. I don’t understand how there could be leverage in a CMO. I would love to read up about it if you could point me to an article on this.
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