And so, instead of mild medication and rest, it became apparent that quadruple bypass surgery is necessary. The extreme measures are extended government guarantees and the formation of an RTC-like holding company housed within the Treasury. Critics call this a bailout of Wall Street; in fact, it is anything but. I estimate the average price of distressed mortgages that pass from “troubled financial institutions” to the Treasury at auction will be 65 cents on the dollar, representing a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 to 15 percent to the Treasury. Financed at 3 to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 to 8 percent. Calls for appropriate oversight of this auction process are more than justified. There are disinterested firms, some not even based on Wall Street, with the expertise to evaluate these complicated pools of mortgages and other assets to assure taxpayers that their money is being wisely invested. My estimate of double-digit returns assumes lengthy ownership of the assets and is in turn dependent on the level of home foreclosures, but this program is, in fact, directed to prevent just that.
In effect, the Treasury will have the fate of the American taxpayer in its hands. The Resolution Trust Corp., created in the late 1980s to deal with the savings and loan crisis, dealt with previously purchased real estate, which was flushed into government hands with a “best efforts” future liquidation. Today, the purchase of junk mortgages, securitized credit card receivables and even student loans will be bought at prices significantly below “par” or cost, and prospectively at levels allowing for capital gains. This is a Wall Street-friendly package only to the extent that it frees up funds for future loans and economic growth. Politicians afraid of parallels to legislation that enabled the Iraq war are raising concerns about a rush to judgment, but the need for speed is clear. In this case, there really are weapons of mass destruction — financial derivatives — that threaten to destroy our system from within. Move quickly, Washington, with appropriate safeguards.
In California housing has already fallen more than 50% with no sign of a bottom. (When you have a mean price of 400,000, it is likely to fall 75%).
In the Depression homes fell 75%.
Buying the mortgages at a 35% discount gives wall Street a 40% gift.
[blockquote]Genesis 47:13-25
Joseph and the Famine
13 There was no food, however, in the whole region because the famine was severe; both Egypt and Canaan wasted away because of the famine. 14 Joseph collected all the money that was to be found in Egypt and Canaan in payment for the grain they were buying, and he brought it to Pharaoh’s palace. 15 When the money of the people of Egypt and Canaan was gone, all Egypt came to Joseph and said, “Give us food. Why should we die before your eyes? Our money is used up.”
16 “Then bring your livestock,” said Joseph. “I will sell you food in exchange for your livestock, since your money is gone.” 17 So they brought their livestock to Joseph, and he gave them food in exchange for their horses, their sheep and goats, their cattle and donkeys. And he brought them through that year with food in exchange for all their livestock.
18 When that year was over, they came to him the following year and said, “We cannot hide from our lord the fact that since our money is gone and our livestock belongs to you, there is nothing left for our lord except our bodies and our land. 19 Why should we perish before your eyes—we and our land as well? Buy us and our land in exchange for food, and we with our land will be in bondage to Pharaoh. Give us seed so that we may live and not die, and that the land may not become desolate.”
20 So Joseph bought all the land in Egypt for Pharaoh. The Egyptians, one and all, sold their fields, because the famine was too severe for them. The land became Pharaoh’s, 21 and Joseph reduced the people to servitude, [a] from one end of Egypt to the other. 22 However, he did not buy the land of the priests, because they received a regular allotment from Pharaoh and had food enough from the allotment Pharaoh gave them. That is why they did not sell their land.
23 Joseph said to the people, “Now that I have bought you and your land today for Pharaoh, here is seed for you so you can plant the ground. 24 But when the crop comes in, give a fifth of it to Pharaoh. The other four-fifths you may keep as seed for the fields and as food for yourselves and your households and your children.”
25 “You have saved our lives,” they said. “May we find favor in the eyes of our lord; we will be in bondage to Pharaoh.”[/blockquote]
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No thanks, Joseph. I’ll pass on this “deal”.
You nailed it, Clueless! They’ll write off their trash, cherry-pick anything worth keeping — and be paid as ‘consultants’ helping to ‘value’ the trash they sell to the US taxpayers….oh, and then they’ll still be in charge of their businesses!
That’s why we need to let Congress know: 1. Don’t be rushed into this bill; 2. Make sure taxpayers get a chunk of any business that asks for a bail-out; 3. No golden parachutes, no astronomical salary and no incredibly high bonuses for anyone working for the companies requesting a bail-out; 4. Mortgage help for homeowners for their residence (NOT some other house they were trying to ‘flip’); 5. Make all ‘bail-out’ money a LOAN, to be paid back with interest to the taxpayers; 6. Tough oversight and ability to sue if Paulson & Co. engage in wrong-doing are absolutely necessary; 7. END the unregulated ‘credit default swap’ market; 8. Tougher regulations of the markets need to be enacted; 9. Prohibit banks from selling/dealing in insurance instruments; 10. New and old regulations need to be enforced.
One does understand why the Jews were so hated by the Egyptians.
However this famine does not come from the hand of the Lord. It comes from the hand of Wall Street. Before we make them our masters, and pay for the debts they have incurred in our name, they need to be prosecuted for fraud, all who sold toxic debt stripped of their ill gotten gains, the particularly culpable (of whom Paulson is one) sent to jail, the Fed shut down, and the power of the purse restored to Congress.
It was similar before WWII. Germany was unable to pay the war debt of WWI that their bankers and government agreed to. Their bankers encouraged the government to print money, just as our bankers are doing now. The same bankers took care to buy real goods (businesses, real estate etc)which soared in value, while hyperinflation impoverished the nation, and robbed the middle class of their savings and pensions overnight.
Rightly or wrongly, back then most leading bankers were Jewish so the outrage was against the Jews (and that was wrong).
That isn’t the case now. Our bankers are diverse (which is a mercy). However if this bailout goes through, there will be blood in Wall Street before it all ends.
And it will end in ugly fashion.
I have never been so afraid for America in my life.
Bill Gross (of CA) is the “king of fixed income”. So he is not disinterested. But his analysis is correct. There are already private funds doing what the Fed proposes, but on a much smaller scale. Discounts could be much larger; recall that Merrill sold a chunk at a 78% discount. The proposal of a reverse auction would likely make for higher discounts than the 35% mentioned.
I am not sure where Clueless’ info came from, but it is way off for CA. There have been a few pockets that have seen 50%, but statewide is half that 20-30%. And Case-Shiller shows a smaller decline for the entire nation, which would be the pool for the Fed fund. Moreover, while we won’t know the bottom until after it’s passed, CA real estate in the lower ranges is being aggressively purchased. E.g. one buyer was approved today as one of eight offers. Another buyer closing Friday was one of ten offers.
It is important that some sort of secondary market be re-established quickly, or there will be a depression. Whether it is the Fed proposal or some variation can be debated. But I think everyone now understands the need for large-scale action. And prople need to understand, as Gross notes, that this is a balilout of Main St. not Wall St.
#5,
If this commercial paper is worth its book value then somebody will buy it at book value. If it is not marketable at book value, then the government and Wall Street are engaged in massive theft. The only way to find out is to see what the free market does with it.
The sky is not falling. Banks continue to lend, albeit not as recklessly–and that is a good thing, and businesses continue to operate. Home prices have been driven to ridiculous valuations through decades of government policy. This has caused all sorts of misallocations of capital and economic reality is now asserting itself, as it always does. The loss this time is falling on an extremely well-placed group with close ties to the current Treasury Secretary. They are using it as an excuse to expand government and transfer wealth.
I would like Republicans out there to answer me this: as the demographics of the US trend inexorably in favor of progressivist politics, how will you feel when all the tools we’ve enthusiastically handed the Bush administration are wielded by Democrats? Though I suppose at this point it really makes no difference.