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After the bailout....
Old 09-23-2008, 10:35 AM   #1
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After the bailout....

So, assuming the bailout goes through, what happens to the value of homes?
The way I see it, credit scores needed to buy a house should shoot up about 50 points. If people can't get loans, people can't buy houses, if people can't buy houses, people obviously can't sell houses. Values must drop in order for people to be able to qualify.
Will only the very wealthy be able to buy and sell?
What will it take to fix things? A good answer may win you a Nobel.
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Old 09-23-2008, 10:38 AM   #2
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We'll be back to the early 80's, and all the ER folks on here will rejoice because 12% CDs will trump their paying $6 a gallon for gas........
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Old 09-23-2008, 11:16 AM   #3
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The financial system bailout plan may increase the risk of stagflation and will probably cause problems for hedge funds and smaller banks, Mohamed El-Erian, co-CEO of bond giant Pimco, told CNBC on Monday. The plan will also lead to slimmer, less risky and probably less efficient banking management over the long-term, while short term it is going to be messy. El-Erian said, View this in the context of massive crisis management response. It came late but when it came, it's big. It's going to be messy; it's not going to be elegant. Over the next two years, the risk of stagflation has increased as the bailout plan needs to be financed, but over the long term the government actually stands to gain, he added. Here's a prediction: they're going to make money out of this.
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Old 09-23-2008, 11:53 AM   #4
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The financial system bailout plan may increase the risk of stagflation and will probably cause problems for hedge funds . .
Good!

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Originally Posted by Art G View Post
Here's a prediction: they're going to make money out of this.
"They" equals "us" as taxpayers. That sounds good, but if we're counting on the accumen of the government to manage this right and come out in the black--well, I'll believe it when I see it.
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Old 09-23-2008, 01:12 PM   #5
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AFAIK Paulson's plan does not have any taxpayer upside..

naked capitalism: Why You Should Hate the Treasury Bailout Proposal
long post but worth reading .. Check out this alarming Paulson conference call report:

Quote:
Yet as we discussed, the plan makes no sense unless the Orwellian "fair market prices" means "above market prices." The point is not to free up illiquid assets. Illiquid assets (private equity, even the now derided CDOs were never intended to be traded, but pose no problem if they do not need to be marked at a large loss and/or the institution is not at risk of a run). Confirmation of our view came from a reader by e-mail:
Quote:
I worked at [Wall Street firm you've heard of], but now I handle financial services for [a Congressman], and I was on the conference call that Paulson, Bernanke and the House Democratic Leadership held for all the members yesterday afternoon. It's supposed to be members only, but there's no way to enforce that if it's a conference call, and you may have already heard from other staff who were listening in.

Anyway, I wanted to let you know that, behind closed doors, Paulson describes the plan differently. He explicitly says that it will buy assets at above market prices (although he still claims that they are undervalued) because the holders won't sell at market prices. Anna Eshoo pressed him on how the government can compel the holders to sell, and he basically dodged the question. I think that's because he didn't want to admit that the government would just keep offering more and more.
another small segment:
Quote:
Losses on the paper acquired are guaranteed. This is not a bug but a feature. The whole point of this exercise is an equity infusion to banks. The failure to be honest about it upfront will lead to a taxpayer backlash (or will lead to the production of phony financial statements for the rescue entity, which will lead to revolt by our friendly foreign funding sources).

Taxpayers have no upside participation.

There is no regulatory reform as part of the package. This would seem to be a minimum requirement for a donation of this magnitude.

There is no admission that deleveraging is inevitable. This plan seems to be a desperate effort to keep bad debt from being written down. Yet the sorry fact is that a lot of these assets simply will not be repaid.

There appears to be no intention to do triage. The financial services industry, on the back of an explosive growth in debt, has reached an unsustainable size. The industry will have to shrink. Yet the Administration does not address this issue; indeed, it appears it intends to forestall the inevitable. Regulators need to decide who will make it, who won't, and figure out what to do with damaged institutions. Instead, the reaction is ad hoc. The stunner was the contemplation of a possible merger between Morgan Stanley and Wachovia. As far as I can tell, the only thing the two firms had in common was coming into crisis on roughly the same timetable. For all I know, their IT systems are not compatible (many an otherwise promising bank merger has been scuttled over IT integration issues).

The short text of Paulson's draft plan is here:
http://www.nytimes.com/2008/09/21/bu...1draftcnd.html

Quote:
Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
someone on Brad DeLong's blog wrote: "I would oppose this even if Jesus Christ himself were the Secretary"
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Old 09-23-2008, 01:15 PM   #6
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Originally Posted by ladelfina View Post
AFAIK Paulson's plan does not have any taxpayer upside..

naked capitalism: Why You Should Hate the Treasury Bailout Proposal
long post but worth reading .. Check out this alarming Paulson conference call report:



The short text of the draft plan is here:
http://www.nytimes.com/2008/09/21/bu...1draftcnd.html
So, your post states that HE has the AUTHORITY to structure the plan? I don't think a Democratic controlled Congress is going to allow that......
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Old 09-23-2008, 01:22 PM   #7
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FD, .. those are the words from the horse's mouth.

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Sen. Jack Reed (D-R.I.) has proposed granting the federal government warrants to acquire stock in financial firms that profit from the bailout. This way, taxpayers would share in the gain if the industry recovered -- which, of course, is the whole point of this exercise.
E. J. Dionne Jr. - Improving Paulson's Cure - washingtonpost.com

Did you see anything about warrants in Paulson's draft?? I didn't.
This is NOT like the RTC.. see the naked capitalist post. The message is "trust me and only me with $700 billion.. 'at any one time' " That is an amount more than the size of the entire economy of Turkey, and closing in on that of Mexico or Australia.
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Old 09-23-2008, 01:25 PM   #8
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FD, my post does not state it.. these are the words from the horse's mouth.


E. J. Dionne Jr. - Improving Paulson's Cure - washingtonpost.com


Did you see anything about warrants in Paulson's draft??
There will be another 100 drafts of this legislation before it's watered down and signed.

Paulson is a Goldman Sachs guy. If there's ANY WAY for the govt/taxpayers to make money at it, he'll figure it out.
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Old 09-23-2008, 01:26 PM   #9
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Ladelfina wrote:
Quote:
Quote:
Quote:
Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
someone on Brad DeLong's blog wrote: "I would oppose this even if Jesus Christ himself were the Secretary"
Of course, this phrase is just boilerplate and means absolutely nothing. Neither the legislature nor the executive branch can tell the courts what they are "allowed" to review.
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Old 09-23-2008, 01:34 PM   #10
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you did mean..
Quote:
Paulson is a Goldman Sachs guy. If there's ANY WAY for Goldman Sachs to make money at it, he'll figure it out.
n'est-ce pas?

sam, why does boilerplate (assuming it is) = meaningless? This is a short document so forgive me if I assume it is there for a reason. If Congress passes an Act, then that is the new law that the courts have to follow. If it includes immunity, then that's also what they have to follow... unless they are going to overturn the whole thing as unconstitutional. It seems pretty clear to me what Paulson wants: a completely free hand to run the markets and buy and sell as he chooses, with a $700 billion piggy bank.

p.s. GS is only standing now because they pioneered the use of this derivative crap, and then sold much of it off to greater fools. This looks a lot like round 2.

p.p.s. a blog trying to assess the legal aspects is here:
http://fabiusmaximus.wordpress.com/2.../paulson-plan/
(N.B. I have never read this source before and need to put off reading the above link as I have something on the stove!)
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Old 09-23-2008, 01:42 PM   #11
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you did mean..

sam, why does boilerplate (assuming it is) = meaningless? This is a short document so forgive me if I assume it is there for a reason.
It's there because it doesn't hurt anything and looks imposing. I'm sure it effectively prevents review by the Post Office IG, and maybe it is intended to discourage review by State courts, but there's no way that Congress or anyone else can pass a law that is not subject to judicial review. If such a thing were possible this handy clause would appear in every law and the SCOTUS would be unemployed.
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Old 09-23-2008, 02:03 PM   #12
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So, assuming the bailout goes through, what happens to the value of homes?
The way I see it, credit scores needed to buy a house should shoot up about 50 points. If people can't get loans, people can't buy houses, if people can't buy houses, people obviously can't sell houses. Values must drop in order for people to be able to qualify.
Will only the very wealthy be able to buy and sell?
What will it take to fix things? A good answer may win you a Nobel.
Middle income people were buying and selling houses long before the advent of liars' loans and interest-only ARMS.

Prices will fall until "average" people can afford to buy at terms that allow the borrower to repay the loan and lenders to make a profit.
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Old 09-23-2008, 02:30 PM   #13
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Middle income people were buying and selling houses long before the advent of liars' loans and interest-only ARMS.

Prices will fall until "average" people can afford to buy at terms that allow the borrower to repay the loan and lenders to make a profit.
Except you may be assuming that middle income people have decent credit. House prices will fall, but to where? In California, they'd have to freefall. What was the average price on a home in LA 20 years ago?
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Old 09-23-2008, 03:16 PM   #14
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Except you may be assuming that middle income people have decent credit. House prices will fall, but to where? In California, they'd have to freefall. What was the average price on a home in LA 20 years ago?
They'd probably fall pretty far*--to exactly where the market, undistorted by gobs of risk-free money dumped into it by Uncle Sam, would dictate. This would accomplish the "affordable housing" goal that so many people say they want, but it does it fairly and prudently, with everyone paying getting the risk they are being paid for.

*This general drop in prices would, of course, exclude Honolulu, where prices can only go up, Up, UP and any downward trend is a hoax.
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Old 09-23-2008, 03:36 PM   #15
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They'd probably fall pretty far*--to exactly where the market, undistorted by gobs of risk-free money dumped into it by Uncle Sam, would dictate. This would accomplish the "affordable housing" goal that so many people say they want, but it does it fairly and prudently, with everyone paying getting the risk they are being paid for.

*This general drop in prices would, of course, exclude Honolulu, where prices can only go up, Up, UP and any downward trend is a hoax.

Should be, except hardly anyone will be able to get the loan, and those who can, won't be able to sell their houses for the same reason. It'll be a trickle up effect.
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Old 09-23-2008, 03:50 PM   #16
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Should be, except hardly anyone will be able to get the loan, and those who can, won't be able to sell their houses for the same reason. It'll be a trickle up effect.
So "hardly anybody" will be able to live in California? If the loan-to-true-value ratio is right, lenders be there. As soon as the prices come down to the levels they should have been all along, there will be buyers.

They don't cal 'em "corrections" for nuthin! (aside from the marketing spin of the word)

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Old 09-23-2008, 04:50 PM   #17
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Again, I half agree with you. Housing should be set at "market value" whatever that means, however, most people will still not be able to qualify for loans, so it won't matter. What you'll probably see are a bunch of people stuck in their houses, and those who can't afford the current payments will just file for the new whine tax credit, have their debt forgiven, and the taxpayers will help them make the payments for them.
The moral of the story, buy a house you can't afford, refuse to make payments and wait for the government to reset your value so you can at least pay taxes.
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Old 09-23-2008, 06:30 PM   #18
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Again, I half agree with you. Housing should be set at "market value" whatever that means, however, most people will still not be able to qualify for loans, so it won't matter.
I don't follow this. In the olden days, bankers figured that you could handle a mortgage payment of about 25% of your income. The median income for a family of four is about $70,000. This converts into a 30 year loan of $247k at 6% or $235k at 6.5%. Sale prices would be about 125% of this if you're making a 20% down payment. So this is a market value for houses that median income families could afford.

Anybody with a steady income and a history of paying bills on time could qualify for a loan on these terms.

Quote:
What you'll probably see are .... those who can't afford the current payments will just file for the new whine tax credit, have their debt forgiven, and the taxpayers will help them make the payments for them.
The moral of the story, buy a house you can't afford, refuse to make payments and wait for the government to reset your value so you can at least pay taxes.
I can agree with this part. If we have the gov't bail out people who make "dumb" decisions, we can expect that what used to be "dumb" is going to become "smart".
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Old 09-23-2008, 07:41 PM   #19
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I don't follow this. In the olden days, bankers figured that you could handle a mortgage payment of about 25% of your income. The median income for a family of four is about $70,000. This converts into a 30 year loan of $247k at 6% or $235k at 6.5%. Sale prices would be about 125% of this if you're making a 20% down payment. So this is a market value for houses that median income families could afford.
You can't buy a McMansion for that! Yet...

Or, you could buy a house for $113,000, re-fi until you get to 5.5%, then have a $563 house payment. Worked for me...
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Old 09-23-2008, 08:24 PM   #20
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Paulson is a Goldman Sachs guy. If there's ANY WAY for the govt/taxpayers to make money at it, he'll figure it out.
This is likely true, only his goal isn't to make taxpayers money. His goal is to save the world financial system. Bernanke gave up the game when he explained to Congress today that "there are two prices for these assets, the fire sale price (which is the current market price) and the hold-to-maturity price." The government is looking to pay the "hold-to-maturity" (read higher) price.
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