Discussion of proposed $700 billion - $1 trillion bailout plan

Thump553

Lifer
Jun 2, 2000
12,216
1,697
126
Here is the gist of an article giving a fairly decent summary of the new proposed mega-bailout:

WASHINGTON (MarketWatch) -- U.S. lawmakers began hammering out legislative authority on Saturday for the Bush administration to undertake a sweeping, $700 billion rescue of the American financial system.
Lawmakers and administration officials were expected to work through the weekend to hash out details of a multipart package to revive the financial system and sustain the U.S. economy.
The plan allows the government to buy the bad debt of U.S. financial institutions for the next two years, according to a draft of the proposed legislation. It gives the Treasury secretary the authority to buy $700 billion in mortgage-related assets, in a bid to address the root cause of the turmoil that swept through markets this past week and resulted in the filing for bankruptcy by and government takeovers of some of the biggest U.S. financial companies.
It would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion. The proposal does not specify what the government would get in return from financial companies for the federal assistance, according to a copy of the brief draft plan.
The administration and Congress are aiming for quick action on the plan as markets remain jittery.
On Saturday, President Bush called the crisis "a pivotal moment for America's economy," in his weekly radio address.
Treasury Secretary Henry Paulson sent the plan to Capitol Hill on Friday night, a Treasury spokesman said. Lawmakers have pledged rapid action. On Friday, some said they were optimistic it would be approved next week.
Sen. Charles Schumer, D-N.Y., in a statement released by his office, offered a mixed reaction to the proposal.
"This is a good foundation of a plan that can stabilize markets quickly," he said. "But it includes no visible protection for taxpayers or homeowners. We look forward to talking to Treasury to see what, if anything, they have in mind in these two areas."
Republican and Democratic staff from the Senate Banking Committee and the House Financial Services Committee were set to meet with Treasury staff Saturday to discuss the proposal.
Democrats on Capitol Hill are expected to demand that the legislation include some of their priorities in return for quick passage of the plan.
Analysts said that this would likely include some mechanism to help homeowners refinance mortgages on homes that have dropped sharply in value.
If approved by lawmakers, the plan would give the Treasury secretary broad power to buy and sell the toxic mortgage-related assets without any additional involvement by Congress. The plan would require that the congressional committees for budget, tax and financial services be briefed within three months of the government's first use of the act, and every six months after that, according to reports.
President Bush said the package will be costly but is necessary.
The measures being taken by the administration, the Treasury and the Securities Exchange Commission "require us to put a significant amount of taxpayer dollars on the line," Bush said. "But I'm convinced that this bold approach will cost American families far less than the alternative. Further stress on our financial markets would cause massive job losses, devastate retirement accounts, further erode housing values, and dry up new loans for homes, cars, and college tuitions," he said.
In the unprecedented action, Paulson has said that he wants to spend "hundreds of billions" of dollars to take unsellable mortgage assets off the balance sheets of financial firms. The hope is that this will unclog the financial system and allow banks to lend funds to each other and clients.
The failure of banks to lend is considered a big risk to the economic outlook. Without access to funds, businesses and consumers will cut back spending.
Among the things the government is asking for is the authority to hire asset managers to oversee the buying of assets, the Wall Street Journal reported Saturday on its Web site.
The New York Times reported that Federal Reserve chairman Ben Bernanke warned members of Congress of the risk of a deep and extended recession unless action was taken to clear the toxic mortgage assets from bank balance sheets.
Treasury staff and Hill staff will attend meetings Saturday, while Paulson works the phone with individual members.
Outside experts said it was crucial to know the price that Treasury would pay for the assets.
A deal that is good for banks would be bad for taxpayers, analysts said. A more effective program would also be more costly.
Some legislative add-ons may slow the package. Democrats may want to revisit their proposal of earlier this year to give bankruptcy judges power to lower the principal and interest rate of a home mortgage.
At the moment, bankruptcy judges only have this power over vacation homes. The mortgage industry is firmly opposed to this measure.
Senate Banking Chairman Christopher Dodd, D-Conn., speaking to reporters Friday, said it is important for the final legislation to deal with the record numbers of foreclosures and not just a bailout of financial firms.
"My hope is that this plan will not only allow us to deal with illiquid debt and obligations out there but also focus as well on bringing to a closure the foreclosure problem as well," Dodd said at a press conference.
Note-I grabbed this article because it seems to give a decent, balanced overview of the proposal (although a bit sparse on details). Feel free to link in any other articles you feel of merit.

My thoughts:

1) This is huge-beyond huge-it's even dificult for Washingtonians to grasp the size of this proposal. Roughly put, in one fell swoop this plan will increase our deficit by roughly ten percent. Given the cost of this alone (and I don't know if AIG, Fannie Mae, etc. bailouts already in place are included in the cost, but I doubt it) I think it's safe to say that any major tax cuts or new social programs proposed by either McCain or Obama are dead in the water. We are going to be spending the foreseeable future paying for the problems of the past few years.

2) I'm not sure what Shumer is looking for. If he wants foreclosure relief that really should be a different package. If he wants to limit damage to the taxpayer (admirable goal)-how?

3) The thing that disturbs me the most about this proposal is that it is a true, no strings attached bailout as far as I can see. We take over the bad debts of the banks, brokerage houses, etc. Maybe they take a haircut on the price, but those assets are completely illiquid now. What really galls me is I haven't seen a hint of a discussion about any proposals to stop such aggregious behavior in the future. What I'm seeing is a "get out of debtor's prison free" card. They sell Uncle Sam their junk and tomorrow it's back to business as usual. While I wholehearted support a uniform solution (the piecemeal approach to date-premature grabbing of FNMA and Freddie Mac, generous bailout of Bear Stearns, absolute refusal to bailout Lehman Brothers, and on again, off again High interest rate bailout of AIG) has probably lead to increased instability in the markets-noone knows what Uncle Sam will do and when.

I'm not going to support any plan that is just a bailout and not a remedy. Nothing at all seems to be proposed re regulation going forward in this bill.

Am I missing something? I very well could be, the articles are pretty sparse so far. Anyone else have any thoughts?
 

dmcowen674

No Lifer
Oct 13, 1999
54,894
46
91
www.alienbabeltech.com
Originally posted by: Thump553

I'm not going to support any plan that is just a bailout and not a remedy.

Nothing at all seems to be proposed re regulation going forward in this bill.

Am I missing something? I very well could be, the articles are pretty sparse so far. Anyone else have any thoughts?
Without clamping down on the root cause (Corporation greed controlling the Politicians) the country is cooked.
 

Chaotic42

Lifer
Jun 15, 2001
33,854
958
126
So, if I understand correctly, this is about what happened:

-Property values were dramatically increasing
-Banks offered sub-prime rates to people who couldn't afford regular rates so that those people could buy houses and flip them before the rates changed
-Property values started dropping and therefore people were unable to flip houses
-People defaulted on loans when the sub-prime rates increased

Is that about right?
 

IronWing

No Lifer
Jul 20, 2001
64,632
19,000
136
Folks have pretty much covered the issues. The plan revealed so far is only 1/3 of a plan. The other 2/3 are: How are we going to pay for it? and How do we stop this from happening again?
 

Hayabusa Rider

Admin Emeritus & Elite Member
Jan 26, 2000
50,872
4,216
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I'm not thrilled we're going to do this, but a child could have seen it coming years ago.

You have a good point in that we're floating this money, but don't know how it will be implemented. In theory it could be a good thing, however I suspect incompetence and politics will rear their ugly heads.

As an aside, I'd advise people to watch how this goes in practice because of another huge undertaking in the form of UHC. If Uncle Sam blows this, it's a fair bet they'll screw up health care as well. Generally, incompetence isn't limited to a particular program.

We'll see I suppose.
 

IamDavid

Diamond Member
Sep 13, 2000
5,884
10
81
This is step one. It's necessary to calm the markets and stabilize the entire world economy. What is the alternative? Let everything go the way it's going now? How much would that cost us taxpayers?

BTW: I'm a very strong supporter of free markets, survival of the fittest and so on. Although in this situation it is in the country's and the worlds best interest for the US to act. All his political crap makes me sick when dealing with the economy. Bush/Clinton/Dems/Rep all had a hand in this for many years and I don't think ANYONE or party could have prevented it.
 

Engineer

Elite Member
Oct 9, 1999
39,234
700
126
Originally posted by: TheBDB
What is the government going to do with all the mortgages it buys?
I assume service them. Most people will still pay their mortgages. Hopefully, the government entity will assist these people where the banks would not and possibly keep them paying their mortgages...instead of waking away.
 

event8horizon

Senior member
Nov 15, 2007
674
0
0
the pentagon loses 2.3 TRILLION of taxpayers money before 911. then the figure gets reduced to 700 BILLION. maybe the media needs to get tough with where the hell this money went before the taxpayers start paying interest on another 700 billion that the gov will borrow from the fed.

what is our national debt now with all these bailouts??
from an article about raising our debt limit-
KEY POINTS: According to a draft of the proposed legislation obtained by Reuters: * The government could purchase as much as $700 billion in mortgage-related assets from U.S.-headquartered institutions. * Decisions by the treasury secretary related to the buyback program could not be reviewed by any court. * In a related move, the U.S. government's debt limit would be raised to $11.315 trillion from $10.615 trillion.
http://www.reuters.com/article...07459420080920?sp=true
 

daniel49

Diamond Member
Jan 8, 2005
4,814
0
71
Originally posted by: smack Down
Originally posted by: TheBDB
What is the government going to do with all the mortgages it buys?
Nothing they are buying worthless paper.
Thats not true as per usual.
See engineers post above.
Although the value of said paper is unknown.
 

smack Down

Diamond Member
Sep 10, 2005
4,507
0
0
Originally posted by: daniel49
Originally posted by: smack Down
Originally posted by: TheBDB
What is the government going to do with all the mortgages it buys?
Nothing they are buying worthless paper.
Thats not true as per usual.
See engineers post above.
Although the value of said paper is unknown.
Sorry you need to take off your rose colored glasses. The banks are not going to be dumping the good assets. They are going to be dumping the bad while you cheerleaded the greatest fleecing of tax payers ever.
 

Balt

Lifer
Mar 12, 2000
12,674
482
126
If approved by lawmakers, the plan would give the Treasury secretary broad power to buy and sell the toxic mortgage-related assets without any additional involvement by Congress. The plan would require that the congressional committees for budget, tax and financial services be briefed within three months of the government's first use of the act, and every six months after that, according to reports.
Is this how accountability and oversight are going to be handled? I hope not. :confused:

There's way too much money involved here for one cabinet member to get a blank check. Getting it done quickly is worse than not getting it done at all if there aren't sufficient controls, and EVERY transaction should be public knowledge.
 

sandorski

No Lifer
Oct 10, 1999
69,316
4,639
126
Talk about saddling the next President. Probably should be rejected for that reason alone.
 

Thump553

Lifer
Jun 2, 2000
12,216
1,697
126
Originally posted by: Engineer
Originally posted by: TheBDB
What is the government going to do with all the mortgages it buys?
I assume service them. Most people will still pay their mortgages. Hopefully, the government entity will assist these people where the banks would not and possibly keep them paying their mortgages...instead of waking away.
I think you're right Engineer. I had seen talk before of folding the mortgages into Fannie Mae and Freddie Mac, which could make a lot of sense as they are experienced in the area of holding and deciding which mortgages should be foreclosed and which forebearance agreements could be worked out. This is an area that Congressional Dems are pushing for a solution to be incorporated in this bill. (I'm not sure if FNMA currently actually services any mortgages, ie, whether people send in their mortgage payments to FNMA).

As an (involuntary) stockholder in FNMA, I'm not happy at all with that as it would really wreck the chance of that company recovering in less than a decade, if then, but if that what it takes as part of an overall good solution, so be it.

As far as raising the cash, that's not a problem for the federal government. Be forwarned that this is going to cause substantial inflationary pressure, so avoid/refinance adjustable loans. If I was debating whether to get a car/house loan now or later, all other things being equal I'd go for it now.

It's the third area-the total silence on reform-that disturbs me the most.

Congress has very little time to debate and enact this plan-about a week unless they extend the current session. It will put our Congressmen in an interesting dilemna-adjourning so they can go home and campaign or staying in Washington and actually addressing a crisis.

PS-Treasury Secretary Paulson is going to interviewed tomorrow on Fox News by Chris Wallace-that should be pretty interesting if Chris asks the right questions.

 

BeauJangles

Lifer
Aug 26, 2001
13,941
1
0
Originally posted by: event8horizon
the pentagon loses 2.3 TRILLION of taxpayers money before 911. then the figure gets reduced to 700 BILLION. maybe the media needs to get tough with where the hell this money went before the taxpayers start paying interest on another 700 billion that the gov will borrow from the fed.

what is our national debt now with all these bailouts??
from an article about raising our debt limit-
KEY POINTS: According to a draft of the proposed legislation obtained by Reuters: * The government could purchase as much as $700 billion in mortgage-related assets from U.S.-headquartered institutions. * Decisions by the treasury secretary related to the buyback program could not be reviewed by any court. * In a related move, the U.S. government's debt limit would be raised to $11.315 trillion from $10.615 trillion.
http://www.reuters.com/article...07459420080920?sp=true
I'd rather be in debt implementing a program like the one the government is currently working on versus most of our debt which is just accumulated for no good reason.
 

jman19

Lifer
Nov 3, 2000
11,214
648
126
Originally posted by: Engineer
Originally posted by: TheBDB
What is the government going to do with all the mortgages it buys?
I assume service them. Most people will still pay their mortgages. Hopefully, the government entity will assist these people where the banks would not and possibly keep them paying their mortgages...instead of waking away.
This. Given the size of the government's balance sheet (lol) they'll sit on these assets and sell them at a more appropriate time. All the while, we, the tax payer, will be paying for this brand of fascist gov't intervention.
 

Phil21

Golden Member
Dec 4, 2000
1,015
0
0
So everyone (well, a lot of the "experts") are saying these "investments" have value, which in theory is higher than what the government will be buying for "pennies on the dollar"

Okay...

Why? Why in the heck would any bank give the government assets worth anything, for pennies on the dollar?

Are they being forced to sell things in "packages" - e.g. here are the mortgages we sold for these 6 months in 2007? Or are they being allowed to say "well, these here show a weak payment history! have fun with them! We'll keep these over here that are profitable though!". I wish it were the former, and in which case I'd be "in support" of this bailout - at least the banks will be losing something due to their lack of foresight. If it's the latter though, this is just a huge gift to billionaires with absolutely zero benefit to the taxpayers.

So.. which is it? In my mind, this is the single most crucial detail no one is talking about whatsoever. I'm okay with this being a "bridge loan" of sorts - taking assets no one will invest in currently, but in general should give a decent long-term return. I am NOT okay with just being a free "lol, we'll take whatever shit you want to pass off on us!" dumping ground for the banks. If the banks are picking and choosing, this just seems like a really scummy way to offload all the bad debt and keep the good - problem solved! (for them). You want out of real estate? Fine. Give us everything. The bad AND the good.

 

wwswimming

Banned
Jan 21, 2006
3,702
1
0
i thought this was a good article, by John Mauldin. the article is behind a firewall. it defines/ explains mortgage backed securities & relates that industry to the Mother of All Bail-outs announced Thursday Friday.

one of the details that comes up is, the way in which mortgage-backed securities and how they are divided up into 'tranches', ranging in credit-worthiness from AAA to junk.

there was one detailed analysis of one of those mortgage backed securities products, presented at a financial conference, the kind of conference hedge fund managers & employees go to. it examines all tranches of the product, and estimates the value of the product for different states of the economy/ housing market. that particular product has a value of $1.3 billion, representing 1000-10,000 mortgages that have been bundled together. named Tilson-something.

so, basically, the US government has taken on a huge number of these bundled debts.

what that means, i think it will take us about 6 months to figure out.

the URL for the Tilson presentation
http://sastocks.files.wordpres...gage_crisis_6_6_08.pdf

the part about the Lonshore Credit Derivative starts on page 118. this is one example of a mortgage backed security. this is what the US government has just said they will take off the hands of the banks (not just one credit derivative - hundreds of them). the analysis of the Longshore CDO, presented by the Tilson Partners (something like that) -

CLIFF NOTES -

* the product is junk, like a junk bond, except, more complicated.
* it is a typical product, that is, most of the credit derivative products are - junk. nearly valueless. worth 10 cents on the dollar.

and the article by John Mauldin. it's behind a firewall so i'll paste part of it.

- - - - - - - - - - - - - - - - - - - - - - - - -

Let's jump back 18 months. I spent several letters going over how subprime mortgages were sold and then securitized. Let's quickly review. Huge Investment Bank (HIB) would encourage mortgage banks all over the country to make home loans, often providing the capital, and then HIB would purchase these loans and package them into large securities called Residential Mortgage Backed Securities or RMBS. They would take loans from different mortgage banks and different regions. They generally grouped the loans together as to their initial quality as in prime mortgages, ALT-A and the now infamous subprime mortgages. They also grouped together second lien loans, which were the loans generally made to get 100% financing or cash-out financing as home owners borrowed against the equity in their homes.

Typically, a RMBS would be sliced into anywhere from 5 to 15 different pieces called tranches. They would go to the ratings agencies, who would give them a series of ratings on the various tranches, and who actually had a hand in saying what the size of each tranche could be. The top or senior level tranche had the rights to get paid back first in the event there was a problem with some of the underlying loans. That tranche was typically rated AAA. Then the next tranche would be rated AA and so on down to junk level. The lowest level was called the equity level, and this lowest level would take the first losses. For that risk, they also got any residual funds if everyone paid. The lower levels paid very high yields for the risk they took.

Then, since it was hard to sell some of the lower levels of these securities, HIB would take a lot of the lower level tranches and put them into another security called a Collateralized Debt Obligation or CDO. And yes, they sliced them up into tranches and went to the rating agencies and got them rated. The highest tranche was typically again AAA. Through the alchemy of finance, HIB took subprime mortgages and turned 96% (give or take a few points depending on the CDO) of them into AAA bonds. At the time, I compared it with taking nuclear waste and turning it into gold. Clever trick when you can do it, and everyone, from mortgage broker to investment bankers was paid handsomely to dance at the party.

Will we ever forget Charlie Prince's line, the CEO of Citigroup, saying that "As long as they are playing music, you have to get up and dance?" just a few weeks before the market imploded? Apart from having his rhythm being proven totally horrendous and overseeing an implosion which cost Citigroup tens of billions, it was a great statement of the zeitgeist of the financial world at the time.

The key word here is model. The ratings agencies used data supplied by the investment banks on what the likely default rates would be. It was something like taking an open book test where you get to write the questions. And since home values had only gone up, default rates were low. And of course, the data was from an ear when bankers lent money actually expecting to get paid back.

Inside a RMBS
Let's look at a RMBS. As Berg points out, when you are buying a mortgage backed security, there are really only three questions you need to know the answers to:

How many mortgages will default?
How much will I get back on a defaulted loan?
How much credit enhancement is there in the security?
Let's set the table by looking at a few terms and definitions. Using his example, let's take a mortgage where the home was originally appraised for $400,000 and there is a $300,000 mortgage on the home. Let's assume a default and the bank takes back the home. If they sell the home and recover $240,000 that means they lose $60,000. This is called a 20% severity. If they sold and recovered $150,000 it would be said to have a 50% severity.

Next, let's look at how the rating agencies come up with the AAA rating. First they model the expected losses, with emphasis on the word model. If they figure that worst case that 8% of the loans default at a severity of 50%, then the security would lose 4% of its value. To get an AAA rating you have to have at least two times the coverage of the "modeled" loss. In this illustration, that means that 92% of the loans would be put into the AAA tranche. An A rating assumes a coverage of more than 1 times but less than 2. B means you expect to get your money back and if they model that you will get below 100% back then the rating would be at junk levels.

Now, this next fact is important. All ratings assume a par value of 100. The rating of these bonds has nothing to do with price. After the presentation, Rich sat down with me and pulled up an actual mortgage backed security that was being offered that day on his screen. It was once a AAA rated Alt-A security. If I remember correctly it was a 2006 vintage security.

As of the latest reporting, a little over 5% of the mortgages were over 60 days past due or in foreclosure. In this security, there are no toxic option ARMS. The numbers of mortgages in this security that are in trouble are rising. S&P has downgraded that AAA tranche to BBB, which of course means its value is going down.

And sure enough, the offered price of the security is 70 cents on the dollar, or 70% of the original par value. Now remember, this particular AAA bond will only start to lose money after the lower tranches take up the first 8% of losses. Thus, this bond can be said to have an 8% credit enhancement.

Pricing in Financial Armageddon
Now, let's stress test that loan. For the AAA portion of the loan to lose money, that would mean that 16% of the loans would have to default with a severity of 50% losses. Could that happen? Sure.

But let's look at what buying that loan at 70 cents on the dollar does for the new owner. First, you are getting a much higher yield (interest rate) because you are buying the security at a lower valuation. But something else even more interesting happens.

Even though the security sold at 70 cents, it still gets all of the first of the proceeds of the home owners who pay their mortgages, up to 92% of the original value in the security. How many loans would have to default in order to make the buyer at 70 cents lose money? Remember, we already had credit enhancement of 8%. But at 70 cents, we just "bought" or priced in another 30%. Let's think Armageddon and that 50% of the mortgages default and they only recover 50% of the loans. That would only be a total loss of 25% to the entire collateral of the deal, but it would mean that the new investor still get all of my 70 cents plus another 13% back! The proud new owner could get up to 92% of the monies paid. Even in a pretty bad scenario, you get more than you paid for the security.

Let's walk through the math. Let's say the original security was $100 million (which would be a very small RMBS). The AAA tranche would have cost $92 billion. If you have it at 70 cents on the dollar you paid approximately $64 billion. In my Armageddon scenario above, the security loses 25% or $250 million. The lower rated tranches are completely wiped out losing $8 billion. Your tranche loses the remaining $17 billion which means you get $75 billion and you only paid $64 billion.

So, how bad would things have to get to lose money on this security? If I am doing the math right, 72% of the loans would have to default with a severity of 50% before your investment of $64 billion was impaired by even so much as 1 dollar. If that happened, it would be Armageddon.

So, why is it rated BBB? Because the rating is over the entire tranche and it is made at a par price of 100. The rating is not affected by the current price. As of today, assuming that even double the number of mortgages currently delinquent default with a 50% severity, your returns over the life of the security would be well over 12%. You would get back $92 million for your $64 billion dollar investment along with interest payments.

The reason this presentation was being made to banks and institutions? Because if you are a bank, you can generally only get prime plus 2% on a loan you make. But if you buy this security with your capital, you can make prime plus 6%. That is a large difference to a bank. Performance Trust has sold billions of this type of paper to banks and institutions.

If this is such a good deal, then why isn't everyone hitting the bid? Because these securities are very difficult to analyze. It is time consuming. You need to analyze every loan and develop your own valuations. You simply can't trust the ratings, as they are measuring something completely different.

And the real truth is that many of the various RMBS securities will in fact be totally wiped out or lose a great deal. Many are seeing default rates of 30% or more. You have to be very careful when you walk through this minefield. And in a time of crisis, it is not clear what the new rules will be. What if the government forces lenders to re-set mortgages at some loss level? What if the housing crisis gets worse? On the other hand, what if the government comes in and buys up all the bad mortgages in an attempt to stop the erosion in the home markets. The level of uncertainty in these times makes people a lot more cautious.

There are Alt-A RMBS like the one mentioned above that are probably not worth even 70 cents on the dollar. These things are marked to a market that is frozen. Everything gets lumped into the same basket and it all has to be marked to market by the new accounting rules called FASB 157. The institution selling the above mentioned security is being forced to do so, either because they are in financial trouble or they are not allowed to hold BBB securities in their portfolios and by law are required to sell. And in times of crisis, the selling price is not that of normal times.

Ratings to Collateral to Ratings: A Vicious Cycle
What's a recipe for a perfect financial storm? Let's make a massive amount of bad loans and get them on the books of most of the major financial institutions because they are rated investment grade. Then let's have the loans start to go bad. Throw in some general panic as everyone tries to sell the loans. No one is buying.

Let's make a new rule that you have to mark your illiquid securities to the last price paid by someone desperate to sell. That means that many institutions now have to mark their capital down and that means those pesky rating agencies must by their own rules mark down the ratings of the institutions which of course means that it costs them more to raise capital at a time when they can't get it which means they get lower ratings and so on. It becomes a vicious cycle.

In the early 80's, every major US bank was bankrupt because they had loaned Latin American countries far more than their capital they had on their books. The Latin American countries defaulted. If the US banks had been forced to mark to market, they would have all gone down taking the US economy along with them. So, the Fed simply allowed them to carry the loans at book value, offering liquidity and allowing the banks to buy time to make enough money to eventually write off the loans.

The current mark to market rule, while nice in theory, works in normal times. But it has the unintended consequence of making things worse in crisis times. Why should an institution have to write down a security which over time is going to pay back the lion's share or more of its value just because a severely stressed institution was forced to sell that security at a very low price in a time of crisis?

Yes, there needs to be transparency and we as investors need to know what is on the books of the companies that we invest in. But it is somewhat like my bank asking me to mark to market my home and pricing my loan daily based on that new price. If my neighbor loses his job and sells his home at auction, does that mean my home is now worth less two years from now. Maybe an even better analogy, if I am renting that home to a very good tenant, does my neighbor's price impair my income?

I was, and am, a fan of mark to market pricing. But we need to think through what a market price is. Not all things can be easily marked to market. This is doubly true when "market price" is a nebulous index of mortgage securities which may or not have a fundamental relationship with an illiquid security on the books of an institution which has no intention of selling, especially in a time of credit crisis.

It is one thing to require that you mark your stocks or bonds to market values. It is another thing entirely to require all mortgage backed securities, which are extremely complex things, can be very different one from another and which require a lot of time and effort to value, to be priced as though they are all the same.

FASB 157 needs to be amended this week. If Congress can create a new Resolution Trust Corp in a week, the surely the accounting board, with the suggestion of Treasury, can figure out a better way to price illiquid securities.

This Too Shall Pass
I know that you probably are reeling from all that has happened the past few months and especially the past two weeks. Lehman and Mother Merrill gone? We the people own AIG? Fannie and Freddie? A new housing bailout which will cost hundreds of billions? The Fed creating whole new programs to provide liquidity? Did you notice they loaned some $250 billion this last week to banks all over the world? Stopping short selling?

Want to see in graph form how bad it got and what spooked Paulson, Bernanke and company to act so quickly? Look at these graphs from my friends at Casey Research (http://www.caseyresearch.com/c...9&ppref=JMD119ED0908A). 30 day commercial paper went to 5% from 3% a week ago. The market was literally freezing. And the amount of paper issued is in free fall. Commercial paper is the life blood of the financial and business world. Without it commerce will soon grind to a halt.

{ graphs & charts }

It simply takes your breathe away. As President Bush said today, it does not help to find who is at fault today, we have to figure out how to get out of this mess. It is going to cost the taxpayers a lot of money. While I think the losses on AIG will be rather minor in the grand scheme of things, if you add up Fannie and Freddie and a new RTC, coupled with the stimulus package, you can easily get to $500 billion, and that is probably a low number.

For such a price, we had better get a new regulatory scheme which requires reduced leverage. Want to get really mad? Up until 2003, all investment banks were allowed only 12 to 1 leverage. Then in 2004, the SEC basically gave five banks (and only five banks) the ability to lever up 30 or even 40 to 1. Bet you can guess the five banks. Bear, Lehman, Merrill, Morgan and Goldman. Three down.

As Barry Ritholtz wrote: "So while the SEC runs around reinstating short selling rules, and clueless pension fund managers mindlessly point to the wrong issue, we learn that it was the SEC who was in large part responsible for the reckless leverage that led to the current crisis." (Don't get me started on blaming the short sellers. Let's not blame the people who leveraged up their companies 40 to 1 with bad investments.)

We absolutely must move credit default swaps to a regulated exchange, no matter how much investment banks and hedge funds scream. Must be done. Do it now. Real rules about writing mortgages, although now that losses are in the hundreds of billions, underwriting rules are already becoming quite restrictive.

And while we are at it, a thorough revamping of the rating agencies and the rules they use should be at the top of someone's list."
 

Napalm

Platinum Member
Oct 12, 1999
2,050
0
0
I think the bail-out is absolutely necessary. Without it, the economy could collapse in a way that would make 1929 seem like a walk in the park. If one looks back at that period, one of the major criticisms was that the government and the Federal Reserve did not act quickly or boldly enough. It appears they are not going to make the same mistake again.

The real question in all of this is what this says about Capitalism as a viable system...
 

Jaskalas

Lifer
Jun 23, 2004
31,240
4,748
126
Originally posted by: Napalm
The real question in all of this is what this says about Capitalism as a viable system...
The most capitalistic nation on earth also became the greatest nation on earth. You call it a coincidence?
 

Craig234

Lifer
May 1, 2006
38,548
346
126
Originally posted by: Napalm
I think the bail-out is absolutely necessary. Without it, the economy could collapse in a way that would make 1929 seem like a walk in the park. If one looks back at that period, one of the major criticisms was that the government and the Federal Reserve did not act quickly or boldly enough. It appears they are not going to make the same mistake again.

The real question in all of this is what this says about Capitalism as a viable system...
My impression now is that the government recognizes that this is purely an abuse of the taxpayer that pays off the big guys who acted terribly and rewards them, but that if they don't do it the effect could be far worse. It's somethig I can't how much that's the case and how much it's a cover story to sell their protection of the big Wall Street guys, probably a lot of both.

Watch for the right-wing economic people to have the gall to argue that the cause of this was *too much* regulation, and that the fix is to cut even more regulation, after the public is distracted by other bright shiny objects enough not to pay much attention and get furious. The question whether that view turns into government policy depends who is elected, though it's possible neither of the candidates has the independance from Wall Street needed for doing the right reforms.

Sorry, but I think the govrnment would be right to say that firms are not allowed to get so big that an otherwise unjustified bailout has to be given because we can't afford not to.

I see nothing wrong with regulations forcing more companies to compete instead of allowing one to get to that point and put our economy at risk.
 

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