Bailout funds being diverted?Follow

Color me suprised.



I'm no financial genius by any stretch, so I couldn't say which plan would be more beneficial to the country in the long run. However, I fully expected the bailout funds would not be used to buy up and re-finance troubled mortgages. I figured the money would be used however "they" wanted once it passed through Congress.

Now there's talk of whether GM needs to be bailed out too. I've got a new plan for success. I'm going to start a company, hire an ***-load of people, build up billions in debt after devising a great Golden Parachute plan for myself and several close buddies whom I will make VP's in some capacity. Once all that is in place, I'll go running to the government crying for a bail-out package.

This plan can't lose.

A misconception: The stocks are worthless, but the assets behind them are not all bad. The problem with mortgage backed securities is that with a 1 in 75 chance of a house getting foreclosed, there's a 1 in 75 chance that a chunk of the asset behind the security is also bad. That means there's a 74/75 chance that any given chunk of an asset is just fine.

They can't convince investers that the mortgage backed securities have any value, so in terms of what they sell on the market, they are indeed worthless. But someone with a lot of money to burn could buy them up, and if the government ever steps in and stops the foreclosure bleeding, they could potentially clean up.

Example: You buy $100,000 in mortgage backed securities. The loans behind them are based on debts on four houses for $250,000 each, and they were lumped together and sliced into $1000 securitiy chunks. There is a 1 in 75 chance that each one of those four houses could get foreclosed. If all four are foreclosed, you lose your $100,000. If just one of them is foreclosed, you probably break even (you lose $25,000 up front but the accumulated interest on the other 75K makes up for it.) If none are foreclosed, which is likely the case, then you'll make a tidy profit in the long term.

The problem is that nobody knows what kind of mortgages went into the mortgage backed securities. You don't know if those four houses were made on subprime loans or to Cindy McCain. You have no guarantee of the risk associated with it, making it a pure gamble.

That's why they are worthless. People who invest in long term stocks have no interest in gambling. That's for the day traders and penny stocks.

Edited, Nov 13th 2008 12:19pm by catwho

With all due respect to Ms. Brown......my memory is that the bailout money was virtually no-strings attached to be spent however Paulson thought would best benefit the economy.

Not completely true either though. If we were talking about a normal (unregulated) industry, you'd be correct. The problem is that the language forced into the banking rules by Dems and then President Clinton back in 1999 require that mortgages conforming to Fanny/Freddy programs (in this case CRA loans) must be treated as identical risk. The risk factors, while present, don't currently include the issue that's actually causing the highest risk right now.

This was done to prevent "redlining" of home loans to low income people due to their lack of desirability in the trading market. But now it's having the predicable (to conservatives anyway) effect of making it impossible to assess the real risk of any block of mortgage backed securities. This is made doubly problematic given that those holding the mortgages know exactly which ones are risky and which ones aren't, meaning that those are the ones they're going to try to sell first. Which in turn means no one will buy the first 10% of said securities. And if no one buys the first 10%, no one *can* buy the remaining 90% of perfectly good loans.


As I said months ago on this issue. The correct response should be the government simply stepping in and buying the bad loans right up front. It'll be costly, but will free up the log jam going on right now and turn this thing around. In the long term, the properties represented still do have value, but only the government can afford to hold them long enough to realize that.

As I said months ago on this issue. The correct response should be the government simply stepping in and buying the bad loans right up front. It'll be costly, but will free up the log jam going on right now and turn this thing around. In the long term, the properties represented still do have value, but only the government can afford to hold them long enough to realize that.

One, it's not the loans that are the problem. It's the derived securities market. Because it's a deregulated market, price discovery is near impossible. I'm not a fan of the broad economic policies of this administration, but let me be the first to say that Hank Paulsen and the Goldman mafia at Treasury aren't stupid. If Neel Kashkari can't determine fair value here, either no one can, or the few people who can are going to rape the government at auction and private equity will end up with all of the assets that hold any real value for a pittance and the US will end up with near worthless assets they overpaid for.

What treasury SHOULD do is nationalize the entire market, and pay asset holders a median value over time based on the actual values of the assets as they reach maturity minus a fee. Obviously that has some serious political consequences, but that's the workable solution if you were looking for one. What the unworkable solution will turn out to be is still up in the air.

I agree, but I'm a nasty commie.

Even our 'Socialist' Prime Minister fell short of that.

I thought he handled it fairly well. Not that it's likely to stop Barclays from being renamed Emirates Bank 2, but you know, it was a good approach overall. Any country in Europe can allways tell voters "Hey, we're not Iceland."