Bailout Nation: Freddie, Fannie, and more

[Mark F. Barnes]

Eh? I haven't seen that anywhere. What I've seen says some of the House Republicans wanted to set up federally backed insurance instead of buying the toxic debt.

That was their original proposal they House worked out in advance, that had no chance in hell of flying with the other side they flat out said no to that, it made too much sense. so now they are trying to work with Cobb's deal with revisions. At least they both agree to the necessity of strict oversight. There has to be accountability on this deal no matter what. The Senate had their deal put together and the House had their deal and neither were close to one another. Now they have got to figure out a way to blend them. But the redistribution to ACORN is never going to fly period.

All partisan crap aside, I'd just as soon let it tank and we'll find out who's really liquid or not. Get some of these paper Millionaires and Billionaires out of the mix. Sure it's a huge blow, but this could be ten times worse if it doesn't work, the fall will be further and harder. And we still end up another trillion in dept. This may really look like a fix, but it devalues the dollar more, these hot checks we're writing are getting to be a pretty damn big pile.

[RedScare]

Here's a relatively short article on Credit Default Swaps, the financial instrument that caused this mess.

http://www.newsweek.com/id/161199/page/1

Like Robert Oppenheimer and his team of nuclear physicists in the 1940s, Brickell and his JPMorgan colleagues didn't realize they were creating a monster. Today, the economy is teetering and Wall Street is in ruins, thanks in no small part to the beast they unleashed 14 years ago. The country's biggest insurance company, AIG, had to be bailed out by American taxpayers after it defaulted on $14 billion worth of credit default swaps it had made to investment banks, insurance companies and scores of other entities. So much of what's gone wrong with the financial system in the past year can be traced back to credit default swaps, which ballooned into a $62 trillion market before ratcheting down to $55 trillion last week

[RedScare]

The Repubs had provisions letting judges renegotiate the mortgages of people about to lose their homes, but the Democrats did not like that idea.

This is actually the other way around, isn't it? The 2005 Bankruptcy reform act (worst piece of legislation ever) stripped bankruptcy judges of their ability to rewrite mortgage terms on a case by case basis to allow the debtors to stay in their homes. It was my impression that Democrats wanted to restore that power to the judges, but the Republicans howled in protest.

EDIT: This article suggests that the Democrats demanded the bankruptcy provisions.

http://www.chicagotribune.com/business/chi...0,2839034.story (near the bottom of article)

"There has been some degree of amazement from the White House

[Subdude]

Eh? I haven't seen that anywhere. What I've seen says some of the House Republicans wanted to set up federally backed insurance instead of buying the toxic debt.

That is correct. There was also a proposed provision for reducing taxes on capital gains on investments and I believe some regulatory adjustments.

All partisan crap aside, I'd just as soon let it tank and we'll find out who's really liquid or not. Get some of these paper Millionaires and Billionaires out of the mix.

That was the strategy Treasury Secretary Andrew Mellon followed after the 1929 stock market crash, and since it wasn't terribly effective then Paulson and Bernanke have been quite keen not to repeat it. Mellon's famous quote was

[RedScare]

He doesn't explain how that is so. CDS are a funky market, granted, but I really can't see how the crisis can be attributed to them.

As stated, it is similar to a gun. The gun does not kill, but used recklessly, it can cause great carnage. The CDS were used recklessly by many who had no idea how they worked. Many factors went into this collapse, chief among them being the belief that home values would always go up, making all mortgages and borrowers a safe risk. Obviously, that has been shown not to be the case.

[Subdude]

As stated, it is similar to a gun. The gun does not kill, but used recklessly, it can cause great carnage. The CDS were used recklessly by many who had no idea how they worked. Many factors went into this collapse, chief among them being the belief that home values would always go up, making all mortgages and borrowers a safe risk. Obviously, that has been shown not to be the case.

Fair point, but I think the point remains that despite AIG, CDS have overall worked very well and filled a niche that really needed filling. One unmentioned benefit is that the pricing gives the market's estimate of the credit quality of the counterparty. This is a FAR better assessment of credit risk than the agency ratings, which have become almost a bizarre joke. Where I work we monitor CDS pricing all the time to keep tabs on our counterparties.

Big news is that it looks like the fix is in and the bailout bill goes to Congress tomorrow so it can be signed this week.

[Mark F. Barnes]

While most of our credit crunch began with CDOs (collateralized debt obligations) tied to crappy assets (mainly mortgages on inflated real estate values), I believe that CDSs have created a greater wave of financial uncertainty. Few people even friggin' understand CDSs - how they are priced, chained, valued, or even how much is out there. And as we see now few strategic defaults and we've wiped out trillions in capital. I hope people don't really think this $700 billion is really a fix, it's just a small patch, it's trillions at stake here, that's my worry. The bigger thud if this one fails. As I see it a CDO failure triggers a counterparty failure, which triggers a fire sale on CDOs and the cycle repeats through hundreds of counterparties. As the insurers (counterparties) fail, the underlying security has need to be downgraded - which triggers more CDS payments. The only thing that may prevent a disaster is the complexity of nested CDSs, and the fact that even knowledgeable financial people do not understand how CDSs were bought and sold in the last 6 years. A panic may be avoided because the chains will be so complex to unravel that it could take years for all the dominoes to fall. That's when we could hear the real THUD! This is touchy stuff we are playing with here, this house of cards is very very fragile.

[N Judah]

CDSs are insurance without collateral. How could this possibly be good?

http://www.iht.com/articles/2008/06/01/business/01gret.php

Here's why they would do something like that:

http://www.nakedcapitalism.com/2008/06/ubs...550169374368695

[RedScare]

Fair point, but I think the point remains that despite AIG, CDS have overall worked very well and filled a niche that really needed filling. One unmentioned benefit is that the pricing gives the market's estimate of the credit quality of the counterparty. This is a FAR better assessment of credit risk than the agency ratings, which have become almost a bizarre joke. Where I work we monitor CDS pricing all the time to keep tabs on our counterparties.

Big news is that it looks like the fix is in and the bailout bill goes to Congress tomorrow so it can be signed this week.

True, and this gets back to my earlier post that not only did the Bush Administration (more accurately Alan Greenspan) push relentlessly for fewer regulations, but more importantly, for FEWER REGULATORS. As tough as the CDS are too understand, they are a complete and utter crapshoot when the mortgages are comprised of liars loans, the loans are vouched as accurate, and the credit risk agency proclaims them an A+ investment. When the entire $62 Trillion bundle is based on fraud, nothing can save it.

To make it hurricane related, we can plan for a 3 foot high tide of bad loans, but a 20 foot storm surge of bad debt will wipe out everything in its path. The combination of no regulation of CDS and no regulators for the underlying loans doomed these investments to eventual failure. The SIZE of certain institutions' investment in them (AIG, WAMU, Lehman, Bear Stearns) swamped their ability to withstand the surge. Interestingly, the inventor of the CDS, JPMorganChase, appears to be weathering the storm, I assume because they merely package and sold them, rather than own very many of them.

[Mark F. Barnes]

You know Red me and you had a discussion in another thread about 6 or 8 months ago, about people giving fraudulent info on Credit applications, and buying in over their heads, and how this was going to kill the housing market and was the root of a lot of the foreclosure trend that started last year. It may have been a thread on foreclosures in the Houston Area or something like that. Anyway, what was said then is now coming back on us. Bad paper, that we are evidently buying now. Does that make me and you direct home lenders, since we are buying the bad paper with our money?

[RedScare]

You know Red me and you had a discussion in another thread about 6 or 8 months ago, about people giving fraudulent info on Credit applications, and buying in over their heads, and how this was going to kill the housing market and was the root of a lot of the foreclosure trend that started last year. It may have been a thread on foreclosures in the Houston Area or something like that. Anyway, what was said then is now coming back on us. Bad paper, that we are evidently buying now. Does that make me and you direct home lenders, since we are buying the bad paper with our money?

I recall the discussion, though it could have been in any number of threads, including perhaps, a thread about how the "personal responsibility" party has practiced anything but. But, no worries, Mark. We will not have to pay for it. The two presidential candidates have promised to lower our taxes, so that we will not have to pay for our mistakes. We got a free war out of Bush, and we'll get a free bailout out of McCain or Obama. Ain't life grand in America?

I just hope the Chinese stay stupid enough long enough for us to get away with it.

[Mark F. Barnes]

CSPAN is wide open this morning.

[Mark F. Barnes]

Well here it is for all to download and see, man this is and ugly truck. (See attachment) This is not a good deal, I hope this never passes. I'll bet it get a Veto if it does. GWB has nothing to lose anyway, he's out of a job in 3 months anyway. There are a lot of parts that are going to give a lot of deadbeats a free ride. I can't believe this! Considering the "net present value to the tax payer" the Secretary SHALL CONSENT to reduce the PRINCIPAL. In other words some ass paid 500,000 for an 800 sq ft hovel in California and it's now worth 2 gets a 600,000 free pass. The wording on this is terrible. This Bill doesn't solve a damn thing. I cannot believe Barney Frank got the chair on this committee. He's like dealing with Mr. Magoo. Anytime you hear Barney Frank or Chris Dodd say "affordable housing," that is code for providing money, guaranteed implicitly or explicitly by the taxpayers, to people who probably aren't going to pay it back. This fixes nothing I tell you, they say they are worrying about a depression, no amount of creative accounting or valueless currency will stop it from happening, the longer it is delayed using these tactics the worse it will be when it finally comes. Whoever takes office behind this, is going to wish they were dead before it's over. If this thing manages to pass, we may see the first forfeit in the history of the Presidency. Might be the smartest move.

Listen I know people are some people hurting, believe me. But no one held a gun to their heads and made them buy more than they could afford. But reducing the amount owed on a home to a point the current homeowner could afford to make the payment to avoid foreclosure is just bullshit. People should be forced to move to a smaller home who a smaller mortgage or rent if they can't afford to buy. In many cases these people were unrealistic when they bought. There is no reason to believe they will hold onto something just because they owe less. They would just take the opportunity to trade up ASAP, people with this type of thinking is rampid in today's world. If they do this for anyone there should be clauses that they can't profit from the sale of the home for a certain number of years.

Now it's been argued on the floor by a couple of different people that there may be a little silver lining in here that provides some uptake for the House Republican insurance alternative. As I read it, section 111 that limits golden parachutes for the named execs only applies if assets are purchased under section 101. If the company elects the insurance option (section 102), the comp. and corporate governance stuff doesn't apply. And I guess they think this will make these Evil, Greedy Wall Street CEO's and I thought that the market for these assets was going to recover enough to pull my company out of the death spiral now that the government has stepped in a purchaser of last resort, I'd sure try to hold out as long as possible without selling to the feds to protect my composition package. My problem is this, Why go for the insurance? Where's the real incentive? The government is going to pay you for these. You'll take a loss and then the government will take a loss even further to get these mortgages in line with "net present value to the taxpayer", in other words what the house is worth NOW, then repackage these now whole and good mortgages, supposedly, and sell them back to you at the now reduced rate. Oh yeah, and the new ones are now totally backed by the US. Why the hell would you want to hold onto these and pay insurance, where is the incentive to do so? All I see is us getting screwed in the long run. Pelosi said they are getting equity and protection for the American Taxpayer, with this Bill. Is she really that high as to believe that? The paper we buy up, on property that's value immediately goes in the tank, is then worth only half of what we've invested, how in the hell do we have equitable protection? The answer is simple, we have none, we are left holding paper on property that only worth half as much as what we paid for it. This is a really bad deal.

[musicman]

I cannot believe Barney Frank got the chair on this committee.

i agree....especially after this

[Subdude]

Today was absolutely brutal in the markets. Wachovia was saved by Citi and Fortis and B&B nationalised. Dow's now down 430+ points. S&P down 5.4%.

On top of that the Fed is pumping another $630 billion liquidity into the markets. It looks like the situation is getting so critical that they can't wait even a couple of days until it is signed. Bailout accomplished!

What nobody knows is if the betting is that the bailout won't pass, or that it won't work, or that the panic is just too far advanced at this point to where the bailout doesn't even make a difference. My guess is that Congress will pass the bill quickly - we can't afford more global panic.

[crunchtastic]

Denied:

http://www.usatoday.com/news/washington/20...-congress_N.htm

WASHINGTON

[Subdude]

BREAKING: Failed in the House. Dow down 455.

[TheNiche]

"It's like a big cowpie with a little bit of marshmallow inside and I don't want to eat the cowpie," said Rep. Louie Gohmert, R-Texas.

Interesting.

[Subdude]

They are going to try for a second vote. Otherwise the banking system is in danger of failing very quickly.

[houstonmacbro]

BREAKING: Failed in the House. Dow down 455.

Oh, this is getting good.

[Subdude]

Oh, this is getting good.

No, this is getting very bad.

[houstonmacbro]

No, this is getting very bad.

Honestly, we need this correction.

[Subdude]

Honestly, we need this correction.

Me, I'd rather have prosperity and a stable banking system. Why on earth do we "need" a panic-driven "correction"? Was Japan better off after having no growth for a dozen years after their crash? Did America benefit from the Great Depression? How could a financial panic possibly be better?

[TheNiche]

Honestly, we need this correction.

Do you have any investments?

[houstonmacbro]

Do you have any investments?

Of course. And a house.

But I think that we can't keep spending money we don't have. Take it on the chin now and have better, more stable investment here on out.

[memebag]

How could a financial panic possibly be better?

Because it wouldn't be pretend. We have a lot of institutions that believed they had wealth when they didn't. The bailout would convert that pretend wealth to real wealth by pretending we can finance it via taxes with less severe consequences. I think that's delusional.

The wealth was never there. The question is, do we accept that now or keep pretending for a while and hope things get better?

[Subdude]

Of course. And a house.

But I think that we can't keep spending money we don't have. Take it on the chin now and have better, more stable investment here on out.

I repeat my question. How are we better off by "taking it on the chin"? If you'll pardon me saying so, it seems a rather glib response when people's livelihoods are at stake.

Is it truly better to sink the banking system for the sake of teaching the public lesson about spending? How does this help us? I'm dying to know.

[houstonmacbro]

I repeat my question. How are we better off by "taking it on the chin"? If you'll pardon me saying so, it seems a rather glib response when people's livelihoods are at stake.

Is it truly better to sink the banking system for the sake of teaching the public lesson about spending? How does this help us? I'm dying to know.

Is YOUR livelihood at stake? Do you know anyone personally who's is?

I am not trying to teach a lesson (there are far too many people here to do that), but why should I bail out Wall Street? Why should I make it easier for them, when no one there ever made it easier on me (to get a loan, to finance education, or whatever)?

[Subdude]

Because it wouldn't be pretend. We have a lot of institutions that believed they had wealth when they didn't. The bailout would convert that pretend wealth to real wealth by pretending we can finance it via taxes with less severe consequences. I think that's delusional.

The wealth was never there. The question is, do we accept that now or keep pretending for a while and hope things get better?

What is "real wealth"? Gold bars in the cellar? Is "real" poverty better than "pretend" wealth?

Dow is down 616. But I guess that's OK if it teaches us a life lesson about pretend wealth.

Why should I make it easier for them, when no one there ever made it easier on me (to get a loan, to finance education, or whatever)?

Because we all have a stake in a stable economic system, just like we all have a stake in good schools and a clean environment.

[TheNiche]

Is YOUR livelihood at stake? Do you know anyone personally who's is?

I am not trying to teach a lesson (there are far too many people here to do that), but why should I bail out Wall Street? Why should I make it easier for them, when no one there ever made it easier on me (to get a loan, to finance education, or whatever)?

Yours. What happens when you lose your jobs because your employer can't make payroll and then you can't sell your house because a buyer can't get a loan? ...and in the mean time, your investments being worth half of what they had been, you don't have enough to cover an employment gap, or in the long term, retirement?

Macbro, Wall Street makes your lifestyle possible. It provides the opportunity for entrepreneurs to employ tens, hundreds, thousands, tens of thousands, or hundreds of thousands of people, which in turn drives up wages. The big gigantic risk out there is catastrophic deflation. That's what is going to happen if we don't preserve the institutions...while wiping out the investors that imperilled them!

Me personally, I suspect that I'll have become unemployed by the start of the new year. And I have enough fixed assets that deflation would handily whoop my ass...unless of course the government cranks up the printing presses and institutes hyperinflation as policy. But they probably won't do that because holders of debt, banks and government, would be even more vulnerable.