[kenavi]

Free market theory doesn’t work in a distressed environment.

Either a mortgage is delinquent, or it isn't. If it isn't delinquent, then the gov't can buy them at face value, irrespective of their market value (e.g. a mortgage charging say 5.60 interest would likely be priced below 100c to a dollar, as investors are demanding a higher return). This will provide liquidity to the selling bank, with which it can re-lend to safe risks (at a pretty high interest rate, currently). The bank is still stuck with the delinquent loans, which are its responsibility to collect on. If it can't, and has to recognize loan losses that reduce or eliminate its equity, then the gov't takes over the entire institution and auctions off its assets, just as we did with the Savings & Loans in the 1980s. The execs of the failed institution get nothing, a "golden parachute" doesn't cover you when your employer is bankrupt.

The deep problem with the bailout is it will nationalize our banking system, all of banking will become like Fannie Mae and Freddie Mac. Our dollars will wither to nothing.

[koraz]

Either a mortgage is delinquent, or it isn’t. If it isn’t delinquent, then the gov’t can buy them at face value, irrespective of their market value (e.g. a mortgage charging say 5.60 interest would likely be priced below 100c to a dollar, as investors are demanding a higher return).

***********

I am not sure where you are coming from with this. I heard on CNBC this morning that only 25% of the subprime mortgages are delinquent (or maybe in foreclosure, the difference doesn’t matter for purposes of this discussion). The market is clearly valuing securities backed by subprime at a nearly 100% default rate.

Are you saying that the government should pay face value for these? As much as I think government intervention is needed, there is no way I think they should be paying face value for these!

What is your recommended solution to this crisis?

[Sunnyflorida]

“Either a mortgage is delinquent, or it isn’t.”

I wish it were that simple. It is not. These mortgages are bundled and sold and resold and backed by CDSs. It is a good idea to learn more about the problem before coming up with a solution!!

[Left2Right]

The real issue and crisis here is not the mortgages, but the CDS's and other derivatives tied to them. Currently there are $180 TRILLION worth of CDS's and their associated derivatives being held by US financial firms, with $90 TRILLION being held by JP Morgan-Chase bank. $700 billion or even $7 trillion isn't going to solve this problem. Some large firms are going to have to go down & go down hard. Goldman Sachs must be on the verge of going over the edge on this one, hence pretty boy Paulson trying to propose to Nancy P. last night.

The GOP plan is the only sensible one. Insure the mortgages, but not the derivatives associated with them.