Federal govenment will create entity to hold banks' debt

[Purron]

What is this all about:confused: How much more will we be paying

Stocks surge on report of entity for bad debt: Financial News - Yahoo! Finance

[freebird5825]

ummmm...huh?...say what?....you gotta be s**tting me...sputter....

[socca]

Hmmmm....if a bank originates a $100k mortgage, and the borrower defaults on the loan leaving the bank holding a house worth $80k, then the bank will suffer a $20k loss on the deal if it sells the house for $80k. If the bank has not yet sold the house, then the $20k loss in only on paper and has not yet been realized. From the bank's perspective, this would be a great time to sell the mortgage to the stupid American taxpayer for $100k. The taxpayer then gets to either 1) suffer the $20k loss by selling the underlying crappy asset, or 2) wait around hoping that the underlying asset will appreciate sufficiently to turn the loss into a profit. In either case, the risk has been transferred from the bank to the taxpayer, and that's really what's it's all about, my friends - risk (mis)management. Lord Almighty, from the bank's perspective it's great to have wealthy stupid friends like the American taxpayer and Treasury Secretary Henry Paulson to act as intermediary!!

American 'free-market' capitalism at its finest.

[MasterBlaster]

The concept - is to set up an entity that could sell off the unperfroming/underperforming assets in a systematic manner.

If we go the foreclosure route then we risk the downward spiral of foreclosure - bank failures - severe recession - layoffs - stock and commodity selloffs for liquidity - lost savings - lost pensions - and so on. This Maelstrom would kind of feed on and amplify itself. That's what some people beleive we should try to avoid at any cost. Sure it would cost the govenment and wouldn't really be "fair" to stiff the taxpayers for it. However the alternative is really much worse.

There is precedent from the depression and from the savings and loan bailout for this type thing.

[socca]

Have you already forgotten Enron :confused:

Enron - Wikipedia, the free encyclopedia

CFO Andrew Fastow set up illegal 'off-the-books' entities to purchase bad Enron investments at cost, making Enron appear much more profitable than it really was. I'm having trouble seeing the difference between the activities of Andrew Fastow and Henry Paulson. Why is it when American financial institutions go on a risk & debt acquisition binge, it's the American taxpayers who get stuck with the hangover :confused: :confused:

[MasterBlaster]

I don't quite see the connection with Enron. Sure that crooked deal impacted share/bond - holders and employees. But did it actually cost the government anything ?

How exactly did the taxpayers get stuck on the Enron gig ?

Are you comparing the crooked Enron malfeasance with the mortgage broker - fraud and lack of accurate debt obligation bond-ratings in the housing crisis ?

In my opinion the banks and insurers an somewhat complicit in looking the other way but were not directly fraudelent themselves. The banks are more guilty of stupidity driven by greed for fee-based income than of fraud.

[Martha]

This is good news; we need something like Resolution Trust to hold and unwind the mess.

[Retire Soon]

Congress has hammered out an agreement this

evening for a potential plan to take the the

bad assets off of financial companies which

could reach into the hundreds of billions of

dollars. Do you think it is a step in the right

direction?




U.S. Plans to Clean Up Finance System As Part of Widening Effort to Stem Crisis - WSJ.com

Edit: Typo

[REWahoo]

Don't we already have a thread on this subject here?

[brewer12345]

Finally, the adminisration grew a pair of gazungas and did what needed to be done.

Does anyone else see the delicious irony in all these nationalizations and handouts/bailouts happening under an allegedly conservative Republican administration? Hugo Chavez could only dream about doing his thing on the scale the US feddle gummint has done in the last few weeks.

[Retire Soon]

Oops! Didn't see Purron's post. It was my goof.




Edit: Sorry

[Geoffrey]

There seems to be a consensus that the credit crisis was triggered by "Joe Public" being unable to handle any more debt, culminating in his becoming deliquent in his mortgage payments. IMHO, what is truly ironic about the proposed solution to this crisis is to ask "Joe Public" to shoulder the bill for this mess. It seems to me that adding debt to Joe Public's back isn't going to solve the underlying problem, i.e., help him afford making his mortgage payments and thus furnish support for the real estate market. Won't this tend to make matters worse in the long run?

[cute fuzzy bunny]

I'm going to take in a boarder, and then I'm handing him all of my bills when they come in.

Hey, this idea is catchy!

[Geoffrey]

Quote:

At issue is a proposal to create a new government entity that could take bad assets off of banks' and financial firms' balance sheets and sell them at auction, according to published reports. The online edition of The Wall Street Journal, citing unnamed sources, reported that Treasury officials have been studying the creation of such an entity for weeks, "but have been reluctant to ask Congress for such authority unless they were certain it could get approved." The Journal reported that the entity would not mirror the Resolution Trust Corp., which was created to address the savings and loan crisis in the 1980s. Rather than hold and sell the assets of failed banks as the RTC did, the new entity would "purchase assets at a steep discount from solvent financial institutions and then eventually sell them back into the market" through an auction, the Journal reported.

Somebody help with this one. How is it going to help if the Government sets up a new entity to "purchase assets at a steep discount . . . and then eventually sell them back into the market." There is NO MARKET for this toxic waste -- who's goning to buy it? And, if the Government discounts the assets to what they are really worth, the financial institutions will still fail when the book the loss after selling it to the Government. The only way this will "work" is if the taxpayer subsidizes the losses. This looks like more smoke and mirrors from the Government.

[cute fuzzy bunny]

Easy. The government will take ownership of all the foreclosed homes, and then use them all for free housing for people on welfare.

[Retire Soon]

Quote:

Originally Posted by Geoffrey There seems to be a consensus that the credit crisis was triggered by "Joe Public" being unable to handle any more debt, culminating in his becoming delinquent in his mortgage payments. IMHO, what is truly ironic about the proposed solution to this crisis is to ask "Joe Public" to shoulder the bill for this mess. It seems to me that adding debt to Joe Public's back isn't going to solve the underlying problem, i.e., help him afford making his mortgage payments and thus furnish support for the real estate market. Won't this tend to make matters worse in the long run?

If this is the group consensus, I couldn't disagree more. I believe that the epicenter of the problem was the establishment of current administration's goal of increasing home ownership, which went from 63% to 70% at the height of the bubble. The theory behind this is that homeowners tend to be better citizens. Mortgage companies now had the blessing of the government to finance the All American Dream of home ownership for everyone.

Lenders, who were armed with easy subprime money made no down payment loans to virtually anyone. The only qualification for obtaining a conventional mortgage was the buyer's ability to fog up a mirror.

Most of the people who were persuaded to take this easy financing could have not even afforded to pay market rent on the homes they purchased. Many had lousy credit. Also, many investors purchased homes for rentals with no risk, other than the possibility of losing their good credit if they defaulted. We are seeing many of these defaults at the current time.

Mortgage lenders, credit rating agencies, real estate agents, appraisers, derivative issuers were all part of the problem. They eagerly jumped on the band wagon for quick and easy riches.

Risky paper on these subprime loans were tranched and sold as CDOs (collateralized debt obligations) around the world to unsuspecting investors. Credit rating agencies and lenders had a conflict of interest as these agencies rated these CDOs a higher rating than what they should have been., only to keep their business. A major credit crisis erupted when these ratings had to be lowered.

Whether anyone wants to admit it or not, Joe Public was set up for failure when they took on this real estate at hugely inflated prices. After the "teaser rate" period on these loans expired, the payments went sky high. Joe could no longer afford to make these payments his home went into foreclosure.

Sure, some of those who bought the homes at ridiculously high prices knew what they were getting into and were only gaming the system. They figured they could get cheap or free rent for a couple of years and they just walk away.

The current administration was not in touch with reality when they decided that anyone could own a home. Many of these buyers had less than good credit. Lenders even had "stated income" loans where income was not even verified.

Now, we taxpayers are being asked to foot the bill for the excesses of incompetent and greedy CEOs who made millions in salaries and bonuses while they were swept up in the euphoria of ever increasing housing prices. IMHO, the whole housing bubble was a case of collective psychosis.

While prices were rapidly rising, people kept buying the homes thinking that prices would go up for ever. Lenders kept granting the easy mortgages and now we have the worst financial crisis since the Great Depression. This time it is different. There is more to fear than fear itself.
.

[Geoffrey]

At least with the Resolution Trust Corporation we (the taxpayers) had the satisfaction of seeing the offending institutions go out of business -- although we were still stuck with the bill. Apparently this plan will permit the offenders to escape any consequences and continue "business as usual" -- while shifting all of the risk and ultimate loss to the taxpaper. This really sucks! Heads should roll!

[Nords]

Quote:

Originally Posted by Geoffrey There seems to be a consensus that the credit crisis was triggered by "Joe Public" being unable to handle any more debt, culminating in his becoming deliquent in his mortgage payments. IMHO, what is truly ironic about the proposed solution to this crisis is to ask "Joe Public" to shoulder the bill for this mess. It seems to me that adding debt to Joe Public's back isn't going to solve the underlying problem, i.e., help him afford making his mortgage payments and thus furnish support for the real estate market. Won't this tend to make matters worse in the long run?

I see this as a case of "pay me now or pay me later".

We could just let laissez-faire capitalism run its course. Screw all the guys who can't pay their mortgages and let foreclosure sort it out. Wilbur Ross will grudgingly pay 15 cents on the dollar for what real estate is left.

Oh, wait, we've seen how well that status quo is working now, and we got a little insight into foreclosure's aftereffects during the Depression. I'm not looking forward to shouldering the govt burdens of unemployment, welfare, neighborhood blight (lower property taxes), higher crime/injury expenses, and lower tax revenues.

Or we could transfer custody to the govt, let them arrange a liquid market for both the buyer & seller, and get people back in business. Companies stay in business, people keep their jobs, families can take care of their homes & neighborhoods, and everybody keeps paying taxes. We could call it... I dunno... voodoo economics the "trickle down" effect!

Hey, it's what goverments do during recessions economic contractions-- deficit spending to keep things going until corporate revenues generate profits. It seemed to work pretty well during the latter halves of the 1930s and 1980s, and I suspect it'll work again.

Especially with Volcker, Greenspan, & Bernanke kvetching from the sidelines...

[MichaelB]

An RTC type approach is probably not going to cost more than the one piece at a time approach, as these pieces are getting big and the line of candidates is getting longer. Chances are the FED would run out of money before the credit crisis was resolved.

It will have two big differences, though. First, it will be a lot quicker. Second, it will deprive lots of hedge funds and folks like PIMCO from making a ton of money speculating against this whole process.

I too think it ironic that the the guys managing this are the ones that tooted the horn for unfettered capitalism - and made tons of money from it. Still, it's better to be pragmatic than dogmatic when survival is on the line.

Regardless of how this plays out, it is clear that the FED + Treasury + White House is determined to see this thing through - and they have more ammo than anybody else. For all those market timers out there, that is a signal if there ever was one.

Michael

[Razor]

We just lost our country. Capitalism just died.