You seem to be assuming this is all about mortgages? Did you read that bail out bill?
I did, and this is way beyond mortgages and this math, while interesting trivia has been irrelevant for a few weeks now.
A normal bank takes in 10 dollars from money invested by shareholders and 90 dollars from deposters and loans out 95 dollars with 5 dollars held in reserve.
In other words a bank keeps 5 dollars of equity for every 20 dollars it loans out on the theory that less than 5% of loans will be in default.
So 576 billion in loses means banks that have loans of 11 trillion are insolvent and can not make any new loans.
That’s right ZERO NEW LOANS.
The perps can burn IMHO, but that is what is wrong with this calculation.
If all those "assets" are for sale at the same time, they aren't WORTH 60 cents on the dollar. They may not even be worth 6 cents on the dollar.
I have a question (not a flame):
What is the source of the data and does it include mortgages on US properties held by overseas institutions?
That’s a logical starting point in the analysis, but there are additional considerations relevant to trying to figure out how precarious the financial system is.
— You noted a snapshot of non-performing loans. But the financial institutions have already been weakened by losses incurred since the beginning of the housing crisis. Imagine blowing up a balloon - that last breath of air that makes the balloon pop may not seem like a lot of air, but the balloon’s capacity to hold air has already been affected by the amount of air put into the balloon before that last breath of air.
— Historical patterns of default rates are not a good guide to the current crisis. Households are more highly leveraged than in past periods of house value stagnation or decline. Many prime loans or Alt-A loans may end up in a similar posture as subprime loans if the borrower has other debt such as home equity loans or credit card debts that leave a high total household debt-to-total asset value ratio. Furthermore, increases in mortgage defaults do not linearly follow house price declines. A decline of another 15% in average house prices in an area from current conditions might trigger, say 40% of the mortgages in the area to go underwater, just to pick numbers. Also, a change in attitudes towards home ownership by flippers and the unknown effect of illegal aliens who have mortgages may mean a higher percentage of people willing to simply walk away from their mortgage debt instead of trying to continue to pay it or work out a payment plan with the lender, compared to the past.
— In creating a mortgage-backed security, a large number of mortgages are pooled. Someone above asked if you mixed 5% of crap into 95% of ice cream, would you still eat it? But that even assumes one knows that the percentage of crappy mortgages is 5%. The unknown percentage of crappy mortgages mixed into trillions of dollars of mortgage-backed securities introduces valuation uncertainty into much of the total amount of the mortgage-backed securities. The problem is compounded because in the MBSs where the first losses are allocated to certain tranches so as to enhance the credit of other tranches, it is unclear whether and to what extent the amount of crappy mortgages is enough to “breach the levee” and affect even formerly AAA-rated tranches. Also, it is impossible to generalize the problem because the extent of the problem may vary with each different mortgage pool. Furthermore, the investors who bought the AAA-rated tranches often have no experience in holding and valuing mortgage-related assets, they bought them solely as a AAA-rated security roughly fungible with non-mortgage-backed AAA-rated securities, increasing their uncertainty as to how to deal with their holdings.
— We are dealing with a dynamic system with feed-back effects. If the government bailout were to work and the economy avoided a serious recession, the amount of total mortgage-related losses that would end up being absorbed by capital in the financial system would be dramatically less than the situation if there was no bailout (or other governmental action as effective as the bailout) and the economy went into a severe recession or worse, with sharply higher unemployment. This is one of the arguments why many believed it was conceivable the government could actually make a profit on the bailout scheme, at the end of the day.
— The concern of bad debt is not limited to residential mortgages. Commercial mortgage debt is of serious concern, as is credit card debt, in terms of potential losses. The residential mortgage problem is thought by many to be a greater problem in terms of effect, so that if pressure can be relieved on this component the financial institutions might have enough resources to weather the problem in the other sectors.
— The uncertainty as to the value of much of the mortgage-backed securities outstanding and the so far institution-by-institution way the crisis has unfolded has left market participants uncertain as to solvency or staying power of potential counterparties in various credit markets. This introduces an additional illiquidity factor, exacerbating the illiquidity premium resulting from the valuation uncertainty. It also makes it extremely difficult for the banks to increase their capital by selling stock to investors, even at what a bank might consider very attractive prices to the investor.
And one could list a number of other relevant factors as well that should be considered if thinking about this problem.
Your math sounds fine, but as I understand it, the problem comes from the fact that so many of the bad mortages were sold in bundles along with those that are still performing that no one knows for sure where all the bad loans are located and who’s holding them - thus all packages of loans become suspect and no one wants to accept them as collateral - the key to freeing up the market short of the grand schemes being pushed by the politicians would seem to be tracking each mortgage to separate the good from the bad so that values could be set according to the reality of each loan - shouldn’t be too hard with today’s computer technology, maybe that’s why those who want more government control of the economy are pushing to get this deal done so quickly, before a more precise method of valuing the mortgages can be instituted.......