Do you support the Paulson bail out?

[Texarkandy]

....
Your original question was "how will this 'bailout' help stabilize home prices?". The answer is that it helps increase the availability, and reduce the cost, of credit.

Which brings us back to my point that if the purpose of this bailout is to bring back a free-and-easy, all-may-borrow credit environment (a major cause of this market illness) - then maybe that's not such a good thing.

 

[audreyh1]

Which brings us back to my point that if the purpose of this bailout is to bring back a free-and-easy, all-may-borrow credit environment (a major cause of this market illness) - then maybe that's not such a good thing.

I don't think we have to worry about that easy money environment coming back for a very, very, very long time. What we want to prevent is the pendulum swinging so far the other way (which is exactly where it is heading right now) that almost no one loans at all and the economy shuts down.

Audrey

 

[Gone4Good]

I would have a whole host of questions that must be answered before I would sign off on the plan. For example:

+ for any particular financial institution, just how much trash needs to be converted to cash before other players suddenly become confident in that institution?
+ just how trashy does an investment have to be before it is eligible to be off-loaded onto the taxpayer?
+ which financial institutions are eligible? all of them? only U.S. or any worldwide?
+ how much is the trash worth? How should it be valued?

Socca, It helps to understand what Paulson is proposing. He's not talking about going institution to institution and bidding for specific assets. Nor is he talking about buying a certain dollar amount of assets from specific institutions. What he is proposing is a reverse auction structure where the Federal Government bids for a certain dollar amount of a specific type of security. Participating firms essentially compete against one another for the Federal Government's limited bid.

One possible way this could work . . . The governement offers to buy up to $10B of a security in a market that has $100B outstanding. Firms choose whether or not they want to participate. If they participate, they offer their securities to the government at a set price. For example:

Firm A offers $2B at $10
Firm B offers $5B at $12
Firm C offers $3B at $13
Firm D offers $4B at $15
Firm E offers $2B at $16

The government then sets an "auction clearing price" at $13. Every firm who offered their securities at, or below, $13 (Firm A, B, and C) sells their securities at that price. Firms D & E get nothing.

The benefit of this is that the government gets the lowest price at which firms are willing to sell their securities. The market now has a liquid benchmark for security valuation. Participating firms now have $10B of cash.

A useful addition to this structure would be to allow non-government institutions to bid for the assets alongside the government.

So to answer questions, 1) each firm decides for itself whether or not it wants to participate 2) The Treasury will determine which securities to include in the various auctions. This hasn't been spelled out, and shouldn't be in legislation. Several factors will likely be taken into consideration with a goal of targeting the most widespread and illiquid securities 3) Treasury has said companies with US operations will be eligible to participate (including non-US entities) 4) The auction sets the value.

 

[73ss454]

So, the government is going to invest this money for us so we can make money on it. Sorta like SS I would guess.

 

[OAG]

I don't think we have to worry about that easy money environment coming back for a very, very, very long time. What we want to prevent is the pendulum swinging so far the other way (which is exactly where it is heading right now) that almost no one loans at all and the economy shuts down.

Audrey

Along with the approval of "the buy the Junk" program. I would not be surprised to see an emergency rate cut along about mid-week to further assist in "restoring confidence" in the market (and hasten the return to "loose money" days).

 

[Gone4Good]

Which brings us back to my point that if the purpose of this bailout is to bring back a free-and-easy, all-may-borrow credit environment (a major cause of this market illness) - then maybe that's not such a good thing.

I think we're talking about two ends of an extreme. Excess credit is bad. No credit is bad. In our current environment we're more in danger of going to zero credit then too much. Regardless of what the government does, the days of negative amortization, interest only ARM is over. The risk of going to no-financing, cash on the barrel head for all transactions, is very real.

 

[Gone4Good]

So, the government is going to invest this money for us so we can make money on it. Sorta like SS I would guess.

Yes, but not like SS. They are buying real assets from financial institutions (not investing in Treasuries like SS).

 

[73ss454]

Ya mean like WaMu and Lehman?

 

[Gone4Good]

Ya mean like WaMu and Lehman?

Exactly.

Only they bought the assets at face value. We'll be picking them up for much, much less.

 

[audreyh1]

Along with the approval of "the buy the Junk" program. I would not be surprised to see an emergency rate cut along about mid-week to further assist in "restoring confidence" in the market (and hasten the return to "loose money" days).

Loose money days are a long, long way away. Even if the Fed cut interest rates to 0%!! With all the deleveraging of the system, money will be tight.

Audrey

 

[socca]

What he is proposing is a reverse auction structure where the Federal Government bids for a certain dollar amount of a specific type of security.

There's a reason why financial institutions can't sell these toxic securities in the existing secondary market. Although the reverse auction model seems delightfully capitalistic, it's still socialism. The taxpayer is still buying securities that no sensible investor would want.

From the Post:

washingtonpost.com

Firms participating in the bailout would be required to grant the government warrants to obtain nonvoting shares of stock, so taxpayers can benefit if the companies return to profitability.

I wonder how this relates to the outright purchase of the toxic waste on these companies' balance sheets.

Meanwhile, House Republicans won a major victory, persuading negotiators to include a provision that would require the Treasury Department to create a federal insurance program that would guarantee banks and other firms against loss from any troubled asset, the official said.

OK, now I'm confused. You realize a loss when you sell a security for less than you bought it for. Until you sell it, your loss is only hypothetical. Does this mean that companies that participate in the reverse auction and sell their securities at a loss to the gov't can be made whole again?

"Many of these assets still have significant underlying value, because the vast majority of people will eventually pay off their mortgages," President Bush said yesterday in his weekly radio address. "In other words, many of the assets the government would buy are likely to go up in price over time. This means that the government will be able to recoup much, if not all, of the original expenditure."

If this were true, there'd be an existing market for these securities.

Of the $700 billion figure, House Majority Leader Steny Hoyer (D-Md.) said: "Nobody believes that's going to be the final cost."

Ahhh...a little honesty. A refreshing change!

 

[Gone4Good]

There's a reason why financial institutions can't sell these toxic securities in the existing secondary market. Although the reverse auction model seems delightfully capitalistic, it's still socialism. The taxpayer is still buying securities that no sensible investor would want.

Ever since the creation of the Federal Reserve the government has held a "lender of last resort" role in our financial system. Nearly everyone agrees (Ron Paul probably excluded) that this is not only good, but necessary.

Over the past several years a "shadow banking system" has sprung into being that is outside the ordinary pervue of the Federal Reserve's authority and the oversight normally demanded of lending institutions. Now that shadow banking system is in collapse and, unfortunately, the government needs to innovate to act in its traditional role as a lender of last resort.

You also assume that markets are always rationale. They are not. As with our discussion of housing prices, above, the same is true for financial securities. So tell me, is the proper price for a house the value that it can be bought at if no financing were available, with 9% financing or 6%? There is no answer! If the financing market is not working (which it is currently not) the "market value" of assets collapse to levels that would not be "sensible" in an orderly financing market.

To put it simply, the conditions for a "market solution" do not exist without a functioning financing market.

Ahhh...a little honesty. A refreshing change!

Paulson said from the very first day that taxpayer money is being put at risk. No one is guaranteeing that the government is going to make money on this deal, although that possibility does exist.

 

[ChrisC]

There's a reason why financial institutions can't sell these toxic securities in the existing secondary market. Although the reverse auction model seems delightfully capitalistic, it's still socialism. The taxpayer is still buying securities that no sensible investor would want.

It is a little more complicated than simple issues of market valuation of the securities. I thought you have previously highlighted a significant component to the current credit crunch -- credit or market phobia, sort of a reverse side of irrational exuberance. This is compounded by the "deleveraging problem" that financial institutions, particularly depository institutions, face when they attempt to down-size these so called "toxic securities" that aren't really that toxic because of underlining credit quality issues -- they are mainly toxic because no one wants to touch them!

OK, now I'm confused. You realize a loss when you sell a security for less than you bought it for. Until you sell it, your loss is only hypothetical. Does this mean that companies that participate in the reverse auction and sell their securities at a loss to the gov't can be made whole again?

Confusion has crept in because you're not aware of the accounting rules that apply here. For most financial institutions (and you might want to read the quarterly statements of Fannie and Freddie), these securities are being marked down from prior book value (i.e. purchase/cost basis) as they're on the balance sheet! I don't know what the mark-to-market could be for these securities, but once sold they off the books and a gain or loss might be recorded depending on the mark-down that occurred before the sale.

 

[Independent]

Except that this plan would simply outrage those homeowners who didn't get checks - a revolution may ensue - at the least many politicians would certainly be voted out of office -

whereas in the alternative - congress doesn't think that joe six-pack would see the Paulson plan as the same thing since he's not missing out on a check somebody else is getting.

Yes it would. The problem with any "plan" is that it's going to give money to somebody who made a bad decision.

IF we do anything, then the prudent people are going to be outraged. So, I'm looking for the least of the evils. One plan gives money to "rich bankers" who should have known better, another only to the home buyers who made the worst possible choices. My plan gives it to everyone who bought during the bubble (though the amounts vary depending on the year you bought and where you bought).

If I were a politician and felt that we had to do something, I would take my chances with this idea before the Paulson plan. I'd always describe the plan as a partial offset to the losses that the buyers incurred when the bubble popped. The people who aren't getting checks are still better off because they didn't lose anything in the bubble.

 

[Independent]

A lump sum mortgage payment may not help because folks who are defaulting face a monthly payment problem, not a principal balance problem. Restructuring the loan with a smaller balance and lower monthly payments or escrowing the money to cover a portion of the monthly payment could work in theory. However this idea faces a huge logistics problem. How do you administer this program on several million loans?

The beauty of this is that you don't need the borrower and lender to work out a compromise restructuring. Borrowers can simply set up escrow accounts and make monlthly payments out of them. If the borrowers prefer to use the escrow account to cover only a fraction of each monthly payment, while paying the rest from their funds, they can do that. I assume some will make a small lump sum payment to get current, then do monthly payments after that. I imagine some people would use the gov't money to pay 100% of their monthly mortgage payment for a couple months while they pay off their credit cards - that's works too.

I can see logistical problems, but notice all the gov't has to do is see if the borrowers meet the requirements of the program, then put a single deposit in a regular bank account with a restriction on the account that all checks coming out have to go to a specific mortgage holder. (I expect that banks would soon be advertising the services they can provide in helping you apply for the gov't program with the expectation that you will use their account when you get the money.) I don't know if this is any harder for the gov't then trying to set up a reverse auction system for thousands of incredibly complex mortgage backed securities.

 

[Gone4Good]

OK, now I'm confused. You realize a loss when you sell a security for less than you bought it for. Until you sell it, your loss is only hypothetical. Does this mean that companies that participate in the reverse auction and sell their securities at a loss to the gov't can be made whole again?

I think the confusion arises from the fact that the insurance proposal pushed by House Republicans is a lousy idea. Paulson said it wouldn't work. I'd tend to agree with him. I think it is being included to get consensus around a bill. I assume it will be included as a tool available to the Treasury but with no requirement to use it. If that's the case I fully expect Treasury to ignore it.

 

[Gone4Good]

I can see logistical problems, but notice all the gov't has to do is see if the borrowers meet the requirements of the program, then put a single deposit in a regular bank account with a restriction on the account that all checks coming out have to go to a specific mortgage holder.

How does the government screen the million of applications to prevent fraud (e.g. FEMA debit cards)? How does the government audit millions of accounts to make sure they are set up and used properly? How does the banking system set up and administer millions of special accounts were nothing of its kind currently exists? How are millions of homeowners educated about the program? These are not small problems.

I agree a reverse auction has logistical challenges of its own. But the auction structure is somewhat "off the shelf" having been used for different purposes over a very long period of time.

 

[Gone4Good]

Buffett can be accused of "talking his book", but I don't think so . . .

Billionaire Warren Buffett told congressional negotiators that if they can't agree on a proposed financial bailout, the nation will face "its biggest financial meltdown in American history,"

 

[FIRE'd@51]

I assume it will be included as a tool available to the Treasury but with no requirement to use it.

This is the way I understand it, also.

 

[OAG]

So not much has change since late Thursday afternoon - but now those that were against it have come on board? Why?

 

[Gone4Good]

I'm not sure I buy into all of this "the sky is falling", "the world is going to end" hype. I can't exactly say why, but it just smells of high pressure sales hype. . . .

I'd kind of like to see a bit of crisis happen before we take very expensive emergency bail-out measures to prevent this predicted "apocolypse"

If you don't see the failure of Bear Stearns, Lehman, AIG, Fannie, Freddie, WaMu and the teetering of Morgan Stanley, Goldman Sachs, Wachovia, etc, etc, as a "bit of a crisis happening" I'm not sure what you think would qualify.

I'd only add that my preference is to install sprinklers before the building burns down or, to paraphrase an old expression, close the barn door before the horse has left.

 

[ChrisC]

Hmmm, lots of recent confusion in this thread, excepting the posts of Audrey h1. I guess people don't realize that a $300 billion homeowner rescue plan, using the FHA program, was passed last July. There seems to be conflation over the immediacy of a credit crunch, potentially choking all credit markets and throwing us into a real recession, and homeowner housing stability.

If you're really concerned about homeowner stability, then there is a painless way of ensuring that: give bankruptcy judges the ability to cram-down home mortgages. That's a very controversial step, which the Democrats tried to add to the bailout bill. Only one candidate has addressed that issue squarely, btw, as far as I can tell.

 

[brewer12345]

I'd only add that my preference is to install sprinklers before the building burns down or, to paraphrase an old expression, close the barn door before the horse has left.

The horse has been stolen, ridden on an airport runway, molested by gypsies, diced up for soup and the hooves have been sold to the glue factory. But Congress is working to keep 'Murica strong!

 

[al_bundy]

Hmmm, lots of recent confusion in this thread, excepting the posts of Audrey h1. I guess people don't realize that a $300 billion homeowner rescue plan, using the FHA program, was passed last July. There seems to be conflation over the immediacy of a credit crunch, potentially choking all credit markets and throwing us into a real recession, and homeowner housing stability.

If you're really concerned about homeowner stability, then there is a painless way of ensuring that: give bankruptcy judges the ability to cram-down home mortgages. That's a very controversial step, which the Democrats tried to add to the bailout bill. Only one candidate has addressed that issue squarely, btw, as far as I can tell.

that's a very dangerous precedent since you are modifying a legal contract after it has been signed. it was done in the depression and I bet the reason we have fannie mae is because it scared foreign investors from the US mortgage market.

 

[Retire Soon]

This is the part that I object to in the Tentative Agreement of the Paulson proposed taxpayer Bail Out. I strongly object to using taxpayer money to buy someone else a house. I paid for my own home and expect everyone to do the same.



Quote from Summary of legislation:

The government can use its power as the owner of mortgages and mortgage backed securities to facilitate loan modifications (such as, reduced principal or interest rate, lengthened time to pay back the mortgage) to help reduce the 2 million projected foreclosures in the next year