Bailout Bill #2: the fight begins

[socca]

Excellent Article below by David Paul. Is anyone in power listening?

David Paul: Deleveraging Society

Some highlights:

Over the past quarter century--dating to the dawn of the Reagan Revolution in fact--America has become awash in debt, and sub-prime home mortgages are just the tip of the iceberg. Home mortgages. Credit cards. Auto loans. Business loans. Federal debt. As shown below, since 1980, our public debt has grown ten-fold, from $4.4 trillion to over $45 trillion.

As we are getting in deeper and deeper debt, and as our national savings rate has declined to near-zero, we rely almost exclusively on foreigners to provide us with capital to fund our excessive public, private and corporate spending habits.

In addition ... our growing debt is also increasingly owned by countries--China and Russia most notably--who are often our adversaries in international affairs. This fact was evident in the Fannie and Freddie bailout a few weeks ago, when Treasury Secretary Henry Paulson took pains to avoid any action that would diminish the value of the Fannie Mae bonds held by the Chinese, even as he wiped out the value of the preferred stock held by domestic banks.

If any of these holders of our bonds should decide to dump our paper or even move to diversify their central bank reserves out of US government securities, the dollar will fall further and our long-term interest rates will rise.

The problem that we face is our growing addiction to debt as the driver of national income growth.

We are no longer a nation that is paying our own way and in control of our financial destiny, but rather have become addicted to increasing uses of debt to financing our way of life. These are not the characteristics of a great nation or a great people.

Historically, the traditional fix to excessive debt is inflation. As inflation grows, the borrowed dollars are paid back in a devalued currency. And that strategy appears to be in play already.

The risk, of course, is how long our international creditors will play this game with us, and when they will look to protect their own financial interests and be a bit less lenient in funding ours.

 

[socca]

What you don't seem to understand is that the short-term lending market is shutting down.

I wasn't making a political statement regarding whether or not we actually have a crisis. I was just expressing surprise that LIBOR is currently so low as compared to short rates during other financial crises I've lived through. Admittedly, the Fed's discount rate and LIBOR aren't the same thing.

 

[Zoocat]

If they raise the FDIC insurance limit they will have to recapitalize the FDIC big time, right? the balance is only $45 billion as of Sept 25.
http://www.bloomberg.com/apps/news?pid=20601213&sid=amZxIbcjZISU&refer=home

"Only once in the FDIC's history have we had to borrow from the Treasury - in the early 1990s - and that money was paid back with interest in less than two years."
Andrew Gray
Director
Office of Public Affairs
Federal Deposit Insurance Corporation

With the hundreds of banks at risk, I doubt they'd be paying it all back in two years.


Also, on a different topic, I question whether it's a good strategy to buy up MBS with the hopes of trying to "stabilize" house prices. First, those prices were artificially inflated due to crazy mortgage terms. Those 4% option ARMs or interest only loans have gone away , big time. If prices are stabilized artificially, the market will WAY slow down because no one can afford those big prices anymore without stupid mortgage financing, esp in Calif or other high priced areas.

There's really no good solution or choices to be made here. The only reasonable analysis I've read is on REG monitor by Noubini
RGE - The US and global financial crisis is becoming much more severe in spite of the Treasury rescue plan. The risk of a total systemic meltdown is now as high as ever

He proposes triage and then nationalizing some of the banks. But his reasoning is impeccable, at least to me.

 

[jIMOh]

How about a plan which does two things

1) allows anyone upsidedown on a mortgage to refinance using fair market value for the 1st mortgage and guarantee a fixed rate loan of 6% for a good or excellent credit score and higher rates for lower scores.

2) the difference between purchase price and fair market value (above) is put on a second mortgage which is in deferrment (no interest paid by borrower) with the interest paid by the federal government and a lien on the house held by the IRS.

If person sells the house, the IRS collects on the lien and pays back the treasury
If the person gets foreclosed on, the IRS knows and write some fines into legislation to make this a BAD situation for the borrower.
If the house appreciates enough, the homeowner should have a way to refinance the IRS lien off the house if they pay the principal amount back to the treasury.

Give a 30 year timeframe for this and do not allow the deed to be transferred without IRS lien being dealt with (so parents do not die and have kids inherit house lien free).

Would this work?

 

[samclem]

What you don't seem to understand is that the short-term lending market is shutting down. This isn't the same thing as the 1980's when credit was readily available at a price. We're running dangerously close to a situation where credit isn't available at all, at any price.

You are arguing against the solution that will absolutely work (higher interest rates) and in favor of a very expensive, stop-gap solution that might work (government giveaways of tax dollars to buy up bad debt). Higher interest rates will absolutely bring out more money to be loaned to businesses. Why is it that you believe, in this one instance, that the laws of supply and demand do not apply, and that money will not be available at any price? I want that solution, thank you, the market-based one. Yes, there will be pain. But it has the virtue of not adding to our tax burden, of laying the real estate mess at the feet of those those who brought the mess to us (buyers and lenders both-or those who bought the paper without knowing what was inside in hopes of a great interest rate). That's the fix I want--the one that goes to root causes.

Did businesses always depend on short-term loans to get by? A profitable business might consider, perhaps, retaining enough from sales to meet their own short-term expenses. Just like families do (or should. Would any responsible person say--"dang, we distributed all our money again, and that darn rent payment is due. Lets get a loan like we did last month!"). Self sufficiency has some benefits, and depending on short-term financing to buy raw material or even to make payroll has definite risks. Well, the word "risk" is the root of the word "risky" for a reason.

 

[Texarkandy]

Agreed! Especially with this part:

.... Higher interest rates will absolutely bring out more money to be loaned to businesses. Why is it that you believe, in this one instance, that the laws of supply and demand do not apply, and that money will not be available at any price? ....

I know I've got quite a bit of "liquidity" just in my little ole portfolio sitting on the sidelines earning very little right now that I'd love to be loaned out to responsible borrowers at the right interest rate return to me.

 

[Running_Man]

Well if I don't really understand how the banking system works, then no.

Central banks around the world injected hundreds of billions of dollars of new liquidity into the market yesterday to try to bring interest rates DOWN. Notwithstanding that, the overnight LIBOR rate increased the most on record (431bp). Yields on CP climbed 171bp. Rates on CP backed by assets (like credit card receivables) increased 229bp.

What you don't seem to understand is that the short-term lending market is shutting down. This isn't the same thing as the 1980's when credit was readily available at a price. We're running dangerously close to a situation where credit isn't available at all, at any price.

According to Bloomberg News:

The idea that this 700 billion will restore liquidity is bullcrap!!! Total and complete, financial markets are using their malfeasance to change the rules and foist their losses on the public. Banks were totally overleveraged and all are moving at the same time to deleverage with any incoming liquidity, the assets are not worth what they thought because the credit default swaps are only good if noone goes under. If they get the loans sold they wouldn't relend the 700 billion they would go and rebuild back their balance sheet loaning at much lower levels more profitably because of reduced competition. .


Talk of how the government would make money on their buyout is ridiculous, they know they are losers and if they were going to be winning portfolios the financial companies would be pulling for loans on the portfolios for their "value" not a purchase by the government. Now that they have the SEC to relax the mark to market they can say whatever they think the dubious securites are worth and take the writedowns when they want and keep investors totally in the dark as they did on the crdit default swaps.

Look at the credit default swaps, so how could you keep dubious debt without worrying about default - by a credit swap to insure and voila! No more risk. A loss that should have occurred no longer exists because it is insured, except in a downturn the insurance is no good, it was never any good unless they didn't need it -- just favorable for accounting at the time and an easy way to look profitable. In 2001 there was less than 1 trillion credit default swaps, by 2007 there was 62 trillion. So far in 2008 that number has receded to 55 trillion as liquidity is going into reducing these positions. These credit default swaps allowed holders to insure against defaults preventing the necessity of selling distressed bonds in an orderly and timely fashion when they should have been sold. So bad inventory all built up in the system and losses were not recognized. Now as they are all going bad together because they all piled in to this trade and noone wants the paper the US government is going to bail them all out with 700 billion!? By the end of this the big 4 banks will be stronger than ever and the US government is going to be staring at a black hole of cash flow as the interest and social security obligations overwhelm it's tax raising capabilities. Won't help the economy any, liquidity will still be hard to come by because there is just too much bad paper but the banks will be ok.


Good luck on that.......

 

[socca]

Just when you thought it couldn't get any worse...

Senate to vote on rescue plan with added tax cut

WASHINGTON — In a bold bid to revive President Bush's multibillion-dollar financial rescue plan, Senate leaders scheduled a vote for Wednesday night on a version of the bill that adds substantial tax cuts meant to appeal to Republicans when it reaches the House.

The goal is to net at least 12 more House votes than the rescue proposal received Monday, when lawmakers rocked the political and financial worlds by rejecting it.

I am stunned, absolutely stunned. Is this really my country? What has happened to America? Are Republicans iittle doggies you can pacify with a tax-cut bone?

What do tax cuts have to do with whether the basic Paulson proposal is a sound strategy? What happened to the concept of Congress as a deliberative body? I can understand playing stupid political games with minor legislation, but a $700B bill? This has degenerated into a farce.

 

[ladelfina]

I found this great site that publishes the legislations under deliberation:

PublicMarkup.org

It allows navigation and comments section-by-section, which is really nice considering how massive these bills can get.

 

[Frugality_of_Apathy]

Senate to vote on rescue plan with added tax cut



I am stunned, absolutely stunned. Is this really my country? What has happened to America? Are Republicans iittle doggies you can pacify with a tax-cut bone?

What do tax cuts have to do with whether the basic Paulson proposal is a sound strategy? What happened to the concept of Congress as a deliberative body? I can understand playing stupid political games with minor legislation, but a $700B bill? This has degenerated into a farce.

Well they're only trying to get 12 more house members, they aren't going to make the bill not a disaster when it's so much easier to add a little something for the other guy. It's the old fat cats scratching each others backs strategy.

 

[socca]

We're matching a 19th century decision making process grappling with 21st century problems. Not pretty.

One advantage of this latest development is that it makes me lose interest in the topic, the process, and the result. I invested a fair amount of time in this topic over the last week because I believed it was important to the future of the country. This was a poor investment. All I can do is protect myself from the consequences, which is all anyone can do, I guess.

 

[al_bundy]

after Grey Monday a lot of congresspeople got calls calling for a bailout because they were scared my the market. pretty sure this thing will die out and will never see the light of day again

 

[REWahoo]

after Grey Monday a lot of congresspeople got calls calling for a bailout because they were scared my the market. pretty sure this thing will die out and will never see the light of day again

Except the Senate is voting on it tonight...

 

[al_bundy]

and the House wants a different version now and they will probably fight over it until everyone forgets it. half of europe is now backing all their bank deposits, 3 month t-bill yields are creeping back up and overnight LIBOR yield is down

and it wouldn't surprise me if central banks started cutting rates

 

[clifp]

The idea that this 700 billion will restore liquidity is bullcrap!!! Total and complete, financial markets are using their malfeasance to change the rules and foist their losses on the public. Banks were totally overleveraged and all are moving at the same time to deleverage with any incoming liquidity, the assets are not worth what they thought because the credit default swaps are only good if noone goes under. If they get the loans sold they wouldn't relend the 700 billion they would go and rebuild back their balance sheet loaning at much lower levels more profitably because of reduced competition. .


Talk of how the government would make money on their buyout is ridiculous, they know they are losers and if they were going to be winning portfolios the financial companies would be pulling for loans on the portfolios for their "value" not a purchase by the government. Now that they have the SEC to relax the mark to market they can say whatever they think the dubious securites are worth and take the writedowns when they want and keep investors totally in the dark as they did on the crdit default swaps.

Look at the credit default swaps, so how could you keep dubious debt without worrying about default - by a credit swap to insure and voila! No more risk.

Good luck on that.......

First how do you know that government can't make money buying severely beaten down securities? Unless you know the prices of the securities, the interest rate, the percentage of non-performing loans, credit score and other factors you really have no clue. Most importantly these mortgage securities aren't just toxic waste as they have erronously been described.

The are mortgage on homes in very desirable locations in the county like California and Florida. If the value of the securities is less than the value of the homes the taxpayers can (and I think we will make money.) Many understanding is that many of the MBS are trading below 50 on the dollar, and since housing price have not dropped 50% there is significant collateral available. Right now Uncle Sam is borrowing money at below 4% the YTM on most of the securities is the 10%+. Considering that best run banks in the country like Wells Fargo make money with a net interest margin in the 2.5%. The difference between 10% and 4% looks pretty good to me. Now obviously many of these mortgages won't be paid back, and we the taxpayers will end up owning a lot of properties and/or restructuring many mortgages. I think a lot of banks would like to keep these securities rather than be forced to sell them during a fire sale, but the are huge drags on their balance sheet and it prevents the bank from loaning money.
With out money to lend it is hard for individuals to buy house and we are caught in a vicious downward spiral.

As long as the government doesn't do anything too stupid like dump all the properties on the market at once, it should be too hard to wait until housing prices stablize before selling the properties.

You realize that during the depression that government bought and refinanced millions of mortgages an when the operation was finally shut down during WWII far from costing the government billions as critics claim, we taxpayers actually made a profit. Far more importantly it kept millions of people in their homes.

Who cares about CDS? Paulson proposal was to authorize the treasury purchase mortgage back securities, CDS are a different problem. A problem which will certainly get worse if banks start failing left and right.

I find this ignorant fear monger almost as scary as Congress.

 

[Westernskies]

How about a plan which does two things

1) allows anyone upsidedown on a mortgage to refinance using fair market value for the 1st mortgage and guarantee a fixed rate loan of 6% for a good or excellent credit score and higher rates for lower scores.

2) the difference between purchase price and fair market value (above) is put on a second mortgage which is in deferrment (no interest paid by borrower) with the interest paid by the federal government and a lien on the house held by the IRS.

If person sells the house, the IRS collects on the lien and pays back the treasury
If the person gets foreclosed on, the IRS knows and write some fines into legislation to make this a BAD situation for the borrower.
If the house appreciates enough, the homeowner should have a way to refinance the IRS lien off the house if they pay the principal amount back to the treasury.

Give a 30 year timeframe for this and do not allow the deed to be transferred without IRS lien being dealt with (so parents do not die and have kids inherit house lien free).

Would this work?

Don't know if it will work, but you may be on to something- convert the shortfalls into something the IRS can collect- those folks are ruthless, and really hard to just walk away from...

 

[ERD50]

I haven't kept up on everything on this, but this little excerpt really got me angry:

U.S. Senate moving toward alternative energy credits - MarketWatch

.... as the U.S. Senate moved to vote on the $700 billion bailout package, which includes tax breaks for alternative energy. The measure includes tax credits for the production and use of solar energy and wind power

They are having trouble passing the bill. The bill should be about the financial situation. Yet, they try to cram these other things into it.

Alternate energy bills should be a separate issue (one that I have strong opinions on).

Congress - DO YOUR JOB!


-ERD50

 

[samclem]

First how do you know that government can't make money buying severely beaten down securities? Unless you know the prices of the securities, the interest rate, the percentage of non-performing loans, credit score and other factors you really have no clue. Most importantly these mortgage securities aren't just toxic waste as they have erronously been described.

The are mortgage on homes in very desirable locations in the county like California and Florida. If the value of the securities is less than the value of the homes the taxpayers can (and I think we will make money.) Many understanding is that many of the MBS are trading below 50 on the dollar, and since housing price have not dropped 50% there is significant collateral available.

Lots of interesting conjecture. Lets look at one hard bit of evidence: The folks with the best knowledge of what might be behind these securities (and who work in RE finance for a living) are not rushing in to buy these great bargains. Gee, why would that be? "Here's free money folks, all you want, scoop 'em up while you can!" And yet-nobody thinks they are worth even the beaten down amount. But somehow you have faith that government functionaries, with no "skin in the game" and using my tax dolars, are better able to judge the marketplace and what these securities are worth. That's a leap of faith.

Here's an idea. If you think these securities are such a great deal, buy them with your own money. Do it today before the government rushes in and you'll make even more. Because one ancillary negative impact of government action will be to drive away private investors and risk-takers after the prices get bid up--the window is closing, don't be left behind! Jump in now, let us know how it goes.

 

[FinanceDude]

I haven't kept up on everything on this, but this little excerpt really got me angry:

U.S. Senate moving toward alternative energy credits - MarketWatch

They are having trouble passing the bill. The bill should be about the financial situation. Yet, they try to cram these other things into it.

Alternate energy bills should be a separate issue (one that I have strong opinions on).

Congress - DO YOUR JOB!


-ERD50

The reason most bills fail is the watering down and/or tack-on legislation that gets put in. Obviously the House GOP folks and even some Dems had a problem with it. Back to the rewrite folks........

 

[cute fuzzy bunny]

This IS their job these days. Wait for something that has to be passed to come along and then see how much crap you can stuff into it that'd never pass on its own.

I still love the commercial with the firemen running congress. Key on that is to require that all bills be kept simple.

http://video.google.com/videoplay?docid=1590969502038856746

I think the reason why regular investors arent taking these is because the income flow is potentially erratic. Its a cash flow issue. The feds have a somewhat smaller concern with cash flow than an institutional or retail investor.

At least thats the excuse. Who knows if its a good deal...

 

[lazygood4nothinbum]

fyi: tonight
An exclusive conversation with Warren Buffett - Charlie Rose

last night charlie had very interesting interview with harvard economist Martin Feldstein but the video is not yet posted on charlie's website. you might check for same later today or tomorrow.

 

[dizzy]

mortgage default question

One thing I'm unclear on: What percentage of the mortgage defaults are financially solvent people walking away from underwater loans due to declining home values, vs. folks actually unable to meet their payment obligations (due to balloon payments, job loss, etc...)? If its primarily the former, is part of the issue that its too easy to walk away once underwater?

 

[lazygood4nothinbum]

as it was explained by feldstein last night, currently there are 10 million homes valued 20% under mortgage. that number could rise by another 10 million and the percent figure could rise to 30-40%

 

[FinanceDude]

as it was explained by feldstein last night, currently there are 10 million homes valued 20% under mortgage. that number could rise by another 10 million and the percent figure could rise to 30-40%

So, the message Congress is trying to send is: "As long as you owe LESS or equal to what your house is worth, continue making your payments. "If you owe MORE than what your mortgage is, then we'll take care of you".......

 

[lazygood4nothinbum]

sorry, no idea. you guys certainly understand this better than i. i'm just scared to death (and taking steps about that--new thread to follow).

what this economist on rose said last night has been said by others here, that the tide needs to be stemmed at the source, housing. i need to listen to the interview again in hopes of understanding it, but he said something to the affect of creating government bonds (at least that's what i think i heard--or how i interpreted what he said) payable to homeowners whereby their mortgage payments will be reduced so they can stay put. the figure he gave was up to $80k per home. but as i said i really do not understand how all that works.

my unknowing opinion is that the government should help people stay in their homes, even at a cost to me who did not benefit from this disaster, but for that gifting, the government should benefit later with a percentage of cap gains on those houses should life improve into our future.