What would you pay, sight unseen, for a house that nobody wants, on a hard-luck street where no houses are selling?
That question is easy compared to the one confronting the Treasury Department as Washington works toward a vast bailout of financial institutions. Treasury Secretary Henry M. Paulson Jr. is proposing to spend up to $700 billion to buy troubled investments that even Wall Street is struggling to put a price on.
A big concern in Washington ”” and among many ordinary Americans ”” is that the difficulty in valuing these assets could result in the government’s buying them for more than they will ever be worth, a step that would benefit financial institutions at taxpayers’ expense.
Anyone who has tried to buy or sell a house when the market is falling, as it is now, knows how difficult it can be to agree on a price. But valuing the securities that the Treasury aims to buy will be far more difficult. Each one of these investments is tied to thousands of individual mortgages, and many of those loans are going bad as the housing market worsens.
By definition, we’re going to overpay for these rotten loans. If not, they would have been sold off on the free market already. It’s only the prospect of Uncle Sucker paying 65 cents on the dollar for instruments that are worth 25 cents on the dollar that has these firms holding onto them.
Pay attention to the political donations made by execs of these companies after this.
Bravo Jeffersonian! Such clarity seems always to elude the “experts.”
In Detroit there are two story houses on the market for 5,000 dollars. (That’s less than the price of a cheap used car). The’ve been on the market for years.
If we buy this garbage, 25% is the most we should pay. And there needs to be tight oversight, legal remedies for fraud, and investigations into Wall Street execs who made out in this market before handing the bill to the federal government.
Don’t buy it – let this thing just play out. What is the event that will happen if we do not throw $700b at the crisis? Some banks need to fail, not be propped up. The inflated value of these junk bundled loans need to find their sea-bed value first.