Problem is we have become an incredibly risk averse country. We want government to help us out of every little bump and scrape.
No flame from me (25 years in mortgage banking). Sounds like you may have overstated the worst case scenario.
So let’s start selling the bad debt now. Why don’t the banks want to do this? Locally banks are getting bids of 70 cents on the dollar or so for foreclosed houses and won’t sell — there was a piece on local TV last night. Why not? Waiting for the bailout to make them whole I would bet.
Do you have any idea what is going on at the banks holding the mortgages?
What...you mean that prices come down to where they should be? Making them more affordable?
Gee..letting the market work...what a concept!
The big problem isn’t the underlying mortgage values. The big problem is the Credit Default Swaps that were written on top of it all.
For point of reference, $1.3 TRILLION of market wealth was wiped out today in the U.S. alone. Over $3 TRILLION globally.
Is the exposure the DIFFERENCE between the loan amounts and the asset values? In this case $384 billion?
What is the estimated value of the worthless credit default swaps on these estimated defaulted mortgages? How does that affect the situation?
Second, include the market-based insurance program which was part of the plan.
Third, realize the bailout is initially only $250B, not $700B.
Combine mark to market elimination, the private insurance program, and the phase one $250B on the CDO market, and estimate the stabilization effects of those actions.
Compare to your $576B.
As I understand it, although the bad mortgages are the underlying cause of the financial problem, it is the derivaties that these banks/investment institutions bought and sold that is the driving force for the meltdown.
The flip side of the coin is the psychological part. It appears that banks are not lending money until they understand where they are with respect to their own assets. How to deal with that?
Here’s my math:
$12 trillion in mortgages
5% in trouble = $600 billion
95% are performing and banks are making, say, 5.25% PER YEAR in interest on the outstanding principal = $598.5 billion in interest revenue made EACH YEAR by the lenders.
Difference = $1.5 billion
They leant the money. They charge interest to cover their risk. The interest made in one year completely covers their losses if the 5% of bad mortgages are utter losses.
Not an expert, but didn’t this bill also put us on tap for failing debt riddled municipalities and cities and towns? I was kinda scared there for a minute I’d have to help bail out Detroit and Chicago, Cleveland, Providence, LA, New Orleans (oh, wait I did that one already)...and maybe the slums of Brazil, oh, yeah and Kenya...and maybe cities under the ocean, Barney Frank’s bath-house and all of Hyde Park, Frankfurt, Bin Laden’s cave network, as well as every roadside attraction, tennis court and shabby Dentist office in America. I was going to help a beekeeper in Muncie, too (Page 77 of the Bill) So I was a bit worried.
And yet the legislation is still in effect to grant high risk loans when the market recovers....
The real exposure is less than that because there are assets and partial income streams behind those mortgages. The problem of course is not mortgages, it would take 100 or 200B at most to fix that. The problem is worthless securities that are NOT mortgage backed, not backed by anything. One example is credit default insurance resold or booked as an asset. It is nothing but a piece of paper. There are many trillions of that.
Assume 95% of the loans are good, and 5% are bad.
So to model this, take 9.5 ounces of vanilla ice cream, and mix in 1/2 ounce of dog feces. Eat the mixture. Can you taste dog feces? What? You threw up? But it was only 5% dog feces, why did such a small amount make you sick?
That’s not it. Multiply that ten fold because of derivatives.
This is a good analysis for outstanding mortgage debt.
One reason the proposed bailout is so much larger than calculated here is because only a percentage of the toxic debt they want us to buy is mortgages.
This isn’t about covering bad mortgages - it is about restoring the lender’s original investment in all kinds of bad debt. Paulson wants to give the lenders liquidity (cash) so they can get back to buying/selling debt. Right now their working capital is tied up in bad debts that will never return their investment, let alone give them a profit.
A very big percentage of the trash debt they want us to buy is bad consumer debt - uncollectible credit card charges, unpaid student loans, car loans, signature loans, etc. Very little of this debt is backed by any kind of collateral. Maybe some of the car loans but usually they only return 20% - 30% on the dollar, when and if you can locate and reposess the vehicle.
And we are not going to get a package of mortgages with only a potential 4% or 5% bad home loans.
The packages we get will have some mortgages mixed in with other debt but almost all will be bad - already foreclosed or far in arrears and they will mostly be undersecured.
Remember - part of the original problem is that lenders assigned unearned and false high credit ratings to unquialified lenders.
So some mortgages were made to lenders with poor credit but the mortgage contract shows they have a good or fairly high credit rating. Another reason why no one really knows what is in these packages.
Here is the way it works. A lender takes a big chunk of low rated and bad debt - say $95 million - and adds just enough higher rated debt, maybe $5 million in up to date mortgages, to bump the whole package rating up enough so they can raise the sell price.
The next buyer buys five packages like that and adjusts the ratio of good debt and bad debt to justify an even higher selling price, and so on.
It ends up that no one really knows what they have bought or what it is really worth. The want the cash flow and a chance to resell at a profit.
But when borrowers stop making their monthly payments the whole house of cards collapses.
The problem isn’t just with the amount of money. Frankly, that’s the last thing on my mind. The objections I, and a lot of other people, have to the bailout bill are in the realm of unconstitutional executive power. The money’s just the most visible problem of this bill.
It’s good to see a big government program voted down for once, though, even if just for a day.