The Bill to Rob Peter to Pay Paul's Mortgage
10-01-2008, 10:36 AM
#21
Don't get me wrong - I don't want to pay for my neighbors' excessive debt, either! I already feel over-taxed as it is, so all these bailouts, I mean rescues, aren't going to help matters.
Trust me, though - you don't want a burned down, uninhabited remains of a formerly nice house next to you. Nobody's going to care for the lawn, it may become a crack house, or infested by rats.
The market lost over 1 trillion $ Monday, b/c we didn't want to spend $700B...
Seems like the crux of the focus is on the govt. buying toxic paper at below market prices, and managing it w/ an ~2 year time window...hopefully w/ the opportunity to realize gains and decrease the net cost to taxpayers.
I just can't imagine many instances of principal reductions, though rate reductions are probably going to happen.
Trust me, though - you don't want a burned down, uninhabited remains of a formerly nice house next to you. Nobody's going to care for the lawn, it may become a crack house, or infested by rats.
The market lost over 1 trillion $ Monday, b/c we didn't want to spend $700B...
Seems like the crux of the focus is on the govt. buying toxic paper at below market prices, and managing it w/ an ~2 year time window...hopefully w/ the opportunity to realize gains and decrease the net cost to taxpayers.
I just can't imagine many instances of principal reductions, though rate reductions are probably going to happen.
10-01-2008, 01:21 PM
#25
If this toxic paper is for sale to the public, I'd be interest for the right price.
tritium pie, all you have to do is model expected cash flows, apply an appropriate discount rate, and calculate the PV. I'm guessing these mortages/MBSs will be sold cheap enough that an upside is likely.
tritium pie, all you have to do is model expected cash flows, apply an appropriate discount rate, and calculate the PV. I'm guessing these mortages/MBSs will be sold cheap enough that an upside is likely.
10-01-2008, 02:55 PM
#26
Registered User
Thread Starter
Originally Posted by Chris S,Oct 1 2008, 01:21 PM
If this toxic paper is for sale to the public, I'd be interest for the right price.
tritium pie, all you have to do is model expected cash flows, apply an appropriate discount rate, and calculate the PV. I'm guessing these mortages/MBSs will be sold cheap enough that an upside is likely.
tritium pie, all you have to do is model expected cash flows, apply an appropriate discount rate, and calculate the PV. I'm guessing these mortages/MBSs will be sold cheap enough that an upside is likely.
10-01-2008, 03:46 PM
#27
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You are touching on part of the problem. They need an exchange. They need to provide liquidity on a shorter term basis at least so the credit market can function. None of that means saving banks or saving people from foreclosure who are in over their head-if that's what they do I'm against it as well and it will be F-U-T-I-L-E. It's a closed system, the government cannot prop up housing beyond what people can afford forever.
tritium, the fact people are not buying does not automatically mean the assets are junk and worthless.
I'll give you an example. On saturday, your house is probably worth 20-30k tops. Why? No one can get a loan to buy your house on saturday. The best case would be a few rich guys with 10k in their wallets might join together and buy it.
On Monday it's worth 200k again since everyone can get loans. Well this is one long weekend and like your house, there is still value in these "worthless" loans even though no one is buying them. And that doesn't include your house paying YOU every month after you buy it like the tranches do to some extent.
tritium, the fact people are not buying does not automatically mean the assets are junk and worthless.
I'll give you an example. On saturday, your house is probably worth 20-30k tops. Why? No one can get a loan to buy your house on saturday. The best case would be a few rich guys with 10k in their wallets might join together and buy it.
On Monday it's worth 200k again since everyone can get loans. Well this is one long weekend and like your house, there is still value in these "worthless" loans even though no one is buying them. And that doesn't include your house paying YOU every month after you buy it like the tranches do to some extent.
10-01-2008, 07:10 PM
#29
I wrote this up for the Vintage forum where old folks have plenty of time to read. 
I figured I'd share it with this crowd.
An open letter to the Average American
Dear fellow citizen,
I understand you called your congressman and demanded that he or she vote against the bail-out bill. That seems to have worked. It is always nice to see our representative system of government giving the voters what they asked for. But sometimes you need what you didn't ask for. That is why the representatives are there in the first place; to study the issues you don't have time to research, and make a decision that is in your best interest. Most of the representatives did not do that yesterday. They voted the way you told them to vote instead. This is understandable. They are all up for reelection this year and most of them are running opposed and they don't want to do anything to piss you off. So I'm afraid you are going to have to take a minute and think about this and give your congressman another call.
You are upset that the government is considering spending up to $700b of your collective dollars to bail out fat cats on Wall Street. You believe they got themselves into this mess, and they should be allowed to fall flat on their own faces. They took the stupid risk, they should pay the consequences, right? Well, I think most of us agree with that, but there is a lot more to the story.
Much of this excess started in your own home town with folks who wanted to buy a house and couldn't afford it. Government, through a combination of action and inaction, allowed lending institutions to relax their lending standards so that people who could never afford a home of their own could finally realize the American dream. Good intentions to be sure, but as it turns out not the best plan. Speculators started to take advantage of the program, as well as folks who simply could not afford to make the payments. It all worked for a while. House values increased, and speculators and high risk borrowers could sell the house for more than they owed and pay off the loan.
The borrowing continued and the lenders needed more money to lend. To raise the capital, they sold the loans to investors. The loans were packaged up with other loans to create very large securities that large investment institutions would be interested in buying. The securities were not only backed by the many mortgages in each offering, but by insurance from a third party that would guarantee payment if the borrowers defaulted. The resulting security was then rated by an agency as a good risk and the investors bought them up. The purchase money went back to the loan originators who put it right back onto the street so more people could buy more homes. This same scenario took place with a lot of different credit obligations. Car loans, business loans, even credit card debt all got packaged up into big bundles and sold to third parties.
Now, when the economy cooled down and inflation went up, folks stopped buying homes and suddenly home values fell. People with mortgages of 90, 95 and 100% of the value of the purchase price of the home were suddenly upside down, owing more than the house was worth. This resulted in foreclosures and suddenly the mortgage backed securities were not paying the stream of income that was originally expected. So the people holding these securities were now losing money on their investment.
Up to this point in the story, you are probably thinking, "well, that's a sad story, but it doesn't change my mind one bit. If you make a bad deal, you live with the consequences." While I tend to agree, let's take a look at a little bit more of the saga.
Not all of these securities are bad. The people who packaged up the loans grouped similar risks together. So many of the instruments were made up of loans given to folks like you and me. People who pay their bills on time, and don't get into too much debt. On the other end were some really risky instruments made up of loans from folks who had no right to borrow a cup of sugar let alone hundreds of thousands of dollars for a house. As you can imagine, as the market got tighter, it was these high risk securities that caused all the problems. But what about the less risky instruments?
The institutions holding all these securities have a bigger problem on their hands than you can imagine. Not only are the high risk instruments not paying, but the companies who agreed to back them cannot honor their guarantee. Banks, investment houses and insurance companies failed. You've already seen it. Money dries up and no one wants to buy these loans. Banks have to keep the loans and start writing off the bad debt and then they don't have money to lend. Even worse, they have to sell off assets to raise money to cover the bad debt and have enough money on hand to meet certain guidelines required by banking regulations.
Now when you have to sell an asset, you have to take whatever you can get for it, so some of those good instruments we just discussed above are being sold for 90, 80, 70, even 60 cents on the dollar. These fire sales set the value for all of the other mortgage backed securities. So suddenly, institutions that are holding hundreds of millions of dollars of these vehicles have to write down their value, and suddenly their books are in pretty bad shape and they cannot meet regulations and they have to sell off too. So suddenly large strong institutions that have good assets are watching their balance sheets run into the red because of a cycle that started with high risk loans.
The federal government looks at the situation and says, hey, this thing is in a death spiral, due to a combination of a relatively small percentage of toxic investment vehicles and the impact of accounting rules. A lot of these assets are pretty good. They are worth a lot more than the current book price, but no one can buy them. Even the bad ones aren't all that bad if you realize that the property that secures them has value that will eventually stabilize and go back up. Lets create a fund of money whereby the government buys these investments, giving the institutions $ they need so that the system does not collapse. We'll hold them and manage them and probably break even. Some say we will make money.
Well, that's the plan we just defeated by calling our congressmen. And what happened as a result? Yesterday the stock market lost about 1.1 trillion dollars in value because the government didn't pass a $700B buy-out bill. Do you own stocks? Do you have a 401k invested in mutual funds? Take a look and see how it did. The point is, this is going to cost us one way or the other. And if we do the bail out, we should be able to recoup the cost over time.
So let's think of it this way, you are driving in a big car with a lot of other people and for whatever reason you control where the driver is going. All of you own the car and you all need it to get where you are going. Because a lot of people in the car overlooked some of the maintenance, the steering is bad. Suddenly the car is heading for a tree. The driver yells to you "What should I do?" Some folks say, tell him to steer the car out of the crash. We'll have it towed to a repair place and all pay for the repairs we need. This will delay our progress and cost us more than it should have if we did the right maintenance along the way, but at least we'll all be safe and the car will keep running. Others say, let it hit the wall, that will teach all those people who cut corners. What do we care what happens to their car?
Hopefully, at some point before we hit the wall, you will realize it is your car too, and you are sitting in it. Make the call and ask your congressman to support the bail out.
I figured I'd share it with this crowd.An open letter to the Average American
Dear fellow citizen,
I understand you called your congressman and demanded that he or she vote against the bail-out bill. That seems to have worked. It is always nice to see our representative system of government giving the voters what they asked for. But sometimes you need what you didn't ask for. That is why the representatives are there in the first place; to study the issues you don't have time to research, and make a decision that is in your best interest. Most of the representatives did not do that yesterday. They voted the way you told them to vote instead. This is understandable. They are all up for reelection this year and most of them are running opposed and they don't want to do anything to piss you off. So I'm afraid you are going to have to take a minute and think about this and give your congressman another call.
You are upset that the government is considering spending up to $700b of your collective dollars to bail out fat cats on Wall Street. You believe they got themselves into this mess, and they should be allowed to fall flat on their own faces. They took the stupid risk, they should pay the consequences, right? Well, I think most of us agree with that, but there is a lot more to the story.
Much of this excess started in your own home town with folks who wanted to buy a house and couldn't afford it. Government, through a combination of action and inaction, allowed lending institutions to relax their lending standards so that people who could never afford a home of their own could finally realize the American dream. Good intentions to be sure, but as it turns out not the best plan. Speculators started to take advantage of the program, as well as folks who simply could not afford to make the payments. It all worked for a while. House values increased, and speculators and high risk borrowers could sell the house for more than they owed and pay off the loan.
The borrowing continued and the lenders needed more money to lend. To raise the capital, they sold the loans to investors. The loans were packaged up with other loans to create very large securities that large investment institutions would be interested in buying. The securities were not only backed by the many mortgages in each offering, but by insurance from a third party that would guarantee payment if the borrowers defaulted. The resulting security was then rated by an agency as a good risk and the investors bought them up. The purchase money went back to the loan originators who put it right back onto the street so more people could buy more homes. This same scenario took place with a lot of different credit obligations. Car loans, business loans, even credit card debt all got packaged up into big bundles and sold to third parties.
Now, when the economy cooled down and inflation went up, folks stopped buying homes and suddenly home values fell. People with mortgages of 90, 95 and 100% of the value of the purchase price of the home were suddenly upside down, owing more than the house was worth. This resulted in foreclosures and suddenly the mortgage backed securities were not paying the stream of income that was originally expected. So the people holding these securities were now losing money on their investment.
Up to this point in the story, you are probably thinking, "well, that's a sad story, but it doesn't change my mind one bit. If you make a bad deal, you live with the consequences." While I tend to agree, let's take a look at a little bit more of the saga.
Not all of these securities are bad. The people who packaged up the loans grouped similar risks together. So many of the instruments were made up of loans given to folks like you and me. People who pay their bills on time, and don't get into too much debt. On the other end were some really risky instruments made up of loans from folks who had no right to borrow a cup of sugar let alone hundreds of thousands of dollars for a house. As you can imagine, as the market got tighter, it was these high risk securities that caused all the problems. But what about the less risky instruments?
The institutions holding all these securities have a bigger problem on their hands than you can imagine. Not only are the high risk instruments not paying, but the companies who agreed to back them cannot honor their guarantee. Banks, investment houses and insurance companies failed. You've already seen it. Money dries up and no one wants to buy these loans. Banks have to keep the loans and start writing off the bad debt and then they don't have money to lend. Even worse, they have to sell off assets to raise money to cover the bad debt and have enough money on hand to meet certain guidelines required by banking regulations.
Now when you have to sell an asset, you have to take whatever you can get for it, so some of those good instruments we just discussed above are being sold for 90, 80, 70, even 60 cents on the dollar. These fire sales set the value for all of the other mortgage backed securities. So suddenly, institutions that are holding hundreds of millions of dollars of these vehicles have to write down their value, and suddenly their books are in pretty bad shape and they cannot meet regulations and they have to sell off too. So suddenly large strong institutions that have good assets are watching their balance sheets run into the red because of a cycle that started with high risk loans.
The federal government looks at the situation and says, hey, this thing is in a death spiral, due to a combination of a relatively small percentage of toxic investment vehicles and the impact of accounting rules. A lot of these assets are pretty good. They are worth a lot more than the current book price, but no one can buy them. Even the bad ones aren't all that bad if you realize that the property that secures them has value that will eventually stabilize and go back up. Lets create a fund of money whereby the government buys these investments, giving the institutions $ they need so that the system does not collapse. We'll hold them and manage them and probably break even. Some say we will make money.
Well, that's the plan we just defeated by calling our congressmen. And what happened as a result? Yesterday the stock market lost about 1.1 trillion dollars in value because the government didn't pass a $700B buy-out bill. Do you own stocks? Do you have a 401k invested in mutual funds? Take a look and see how it did. The point is, this is going to cost us one way or the other. And if we do the bail out, we should be able to recoup the cost over time.
So let's think of it this way, you are driving in a big car with a lot of other people and for whatever reason you control where the driver is going. All of you own the car and you all need it to get where you are going. Because a lot of people in the car overlooked some of the maintenance, the steering is bad. Suddenly the car is heading for a tree. The driver yells to you "What should I do?" Some folks say, tell him to steer the car out of the crash. We'll have it towed to a repair place and all pay for the repairs we need. This will delay our progress and cost us more than it should have if we did the right maintenance along the way, but at least we'll all be safe and the car will keep running. Others say, let it hit the wall, that will teach all those people who cut corners. What do we care what happens to their car?
Hopefully, at some point before we hit the wall, you will realize it is your car too, and you are sitting in it. Make the call and ask your congressman to support the bail out.
10-02-2008, 06:35 AM
#30
Registered User
Originally Posted by Legal Bill,Oct 1 2008, 10:10 PM
Well, that's the plan we just defeated by calling our congressmen. And what happened as a result? Yesterday the stock market lost about 1.1 trillion dollars in value because the government didn't pass a $700B buy-out bill. Do you own stocks? Do you have a 401k invested in mutual funds? Take a look and see how it did. The point is, this is going to cost us one way or the other. And if we do the bail out, we should be able to recoup the cost over time.