Tuesday, September 23, 2008

Where's my handout?

I had this whole post written out yesterday about the Treasury action, but I have had to scrap it because they already seem to be changing the plan dramatically. And in a bad way.

It started out so elegantly simple...to make up for a lack of liquidity, the Treasury would buy illiquid securities from financial institutions at fair prices. Not "give banks $700 billion". In fact, if they really did pay a fair price, it wouldn't end up costing taxpayers anything...the securities would either be held to maturity or sold at a later date when the market was re-established. Sure, there are the sticky issues of valuing things that aren't trading, but there are a lot of smart people at the Fed and the Treasury that could put as good a number on them as anyone.

In its simplest version, it would work like this. A Bank bought something for $1,000, and needs to sell it to raise liquidity but has no buyers at all because no one has any liquidity. The PhD's at the Treasury think the underlying value is $450, so they buy it for that price. The Bank recognizes a loss of $550, but can accept the loss and move forward making new loans, a vital economic activity (actually, maybe THE vital economic activity).

The security then matures or is sold at a later date when the market is re-established. If the valuation was fair, then the taxpayers get back their $450 plus a reasonable return on that capital, whatever that may be. Voila...everyone wins. And further...did anyone really get "bailed out"? The Bank got a fair, highly discounted price for an asset. The taxpayers got a fairly priced asset for their money.

But, of course, we couldn't do anything that simply. And we can't because Bank's have lobbyists and irresponsible borrowers have votes. So, now we need to expand it into other types of loans that are harder to do this with, and we have to make it totally unworkable by forcing discounts on the payments of people who bought homes they never could afford, and we want to add provisions for government ownership in the firms it helps (nationalized banking, anyone?)

And, of course, there is the great question of valuation...exactly how much is an illiquid security worth? The easiest way to value something is to just see what it is trading for...well, that is, by definition, not an option. And, given the lobbying clout of banks, it seem likely that they will get a generous valuation.

So...what will we get? We will probably pay too much for securities, and then make them worth even less by giving gifts to delinquent homeowners. And those of us that work, pay our taxes, don't borrow money we can't afford, save and basically do the right thing? Well...we get to pick up the tab.

I hope I am wrong, but I don't have a lot of faith in Congress to get something worthwhile done.


Anonymous said...

Me neither.

Maybe I should go into default on my condo loan. Seems that would work out better than being responsible and make those monthly payments. I mean I am even unemployed so technically I have an excuse right? Not that it even matters anymore.

Still just me said...

I can only speak from experience on the mortgage situation.

We wanted a house two years ago. The lender qualified us for an amount I really thought we could not afford. The hard selling was pushed, as the lender tried to explain that we could afford this amount, that he had programs to get us into this loan. He also pushed to say that in two years (which would be now) we could re-finance.

We were wise and turned it down, but are now learning how many reluctant borrowers were "talked into" a loan they really could not afford, especially first time borrowers who did not do all the research.

These are the people who I think some of that money needs to go to. The ones who I feel were tricked into beliveing the dream of home ownership could be theirs. They are the ones who are losing their homes because they were led to believe that refinancing was an option. They were led to believe it was obtainable.

So many of these loans were processed, and now the country is in this crises. Give some of that billions to these struggling home owners in order for them to keep their homes in a way that they can afford.

Accidentally Me said...

Annie - You already missed out. You should ahve bought a MUCH bigger place, and never made any mortgage payments. Then you really would have scored!

SJM - That is actually sort of my point. I don't think that most of these homeowners really got tricked into anything. You knew that you couldn't afford it, so you didn't take the loan. I feel like many of the people who took these loans knew deep down exactly what they were doing, and chose to take the risk anyway. Now, the government wants you...the responsible taxpayer...to bail out them.

allbilly said...

where is the industry apology...you just said taxpayers would get screwed...which is a presumption...

Scotty said...

Good sum up in your post, agree wholeheartedly.

A home is probably the greatest purchase someone will make. To not do due diligence on that purchase to really know if you can afford it = no bueno.

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