Decent commentary on the bailout is hard to come by. Certainly most "financial press" fails to fit the bill. It is a pleasant surprise, then, to see Posner describe the issues with something like clarity and aplomb.
A complicating factor was that the value of those securities was and is very difficult to determine, because each security represents a share in pieces of many different mortgages. The bank that owns the security cannot readily determine the value of all those different mortgages, since it has no direct relationship with the mortgagor, having sold the mortgage to the entity that issued the mortgage-backed securities.
[...]
If the Treasury pays the actual value (if anyone can determine what that is) of the securities, it will not be injecting new capital into the banking industry, but merely swapping one form of capital for another. If the Treasury pays more than the securities are worth, then it is contributing capital to the industry all right, but it is also enriching the owners and managers of the banks, which creates the familiar moral hazard problem as well as upsetting people by rewarding careless management practices. The more it overpays, the most costly the bailout plan to the taxpayer.
There is a rather serious issue here that has gotten only the smallest bit of attention. How difficult are mortgage backed securities to value? And, given that they are difficult or impossible to value, is it a coincidence that the Treasury seems to be using this opacity to funnel some extra cash.
The $700+ Billion Bailout [The Becker Posner Blog via Broken Symmetry]
Posted by guest , Sep 29, 2008 6:25PM
Raymond James is applying to be a bank. Looks like it keeps coming down the line.
http://www.financial-planning.com/asset/article/708091/raymond-james-financial-apply-bank-holding.html?pg=
Posted by guest , Sep 29, 2008 6:25PM
debtx.com
Though, the real issue isn't pricing in the secondary market, it's just that nobody LIKES the bid-ask spread. There are going to be people who make a KILLING on this stuff - just that might require 5CotD.
Net net, we need job creation, transparency, credit and to increase the velocity of money.
With all the brouhaha today I've yet to hear one Congressperson talk, in real terms, about what's at stake and WHY it is at stake. "Very bad things" is not a pill Joe Main Street is going to swallow.
Posted by MostOffensive , Sep 29, 2008 6:26PM
Dark skies over the Capitol... http://voices.washingtonpost.com/thefix/2008/09/the_failure_of_the_financial.html?hpid=topnews
also includes analyzes the vote a bit further.
Posted by guest , Sep 29, 2008 6:30PM
what was this on the bill:
H R 3997 RECORDED VOTE 29-Sep-2008 2:07 PM
QUESTION: On Concurring in Senate Amendment With An Amendment
BILL TITLE: To amend the Internal Revenue Code of 1986 to provide earnings assistance and
tax relief to members of the uniformed services, volunteer firefighters, and Peace Corps volunteers,
and for other purposes
WTF is this???? PROVIDE EARNINGS ASST FOR GOVERNMENT WORKERS???? WTF??
PEACE CORP EARNGINS????
Posted by guest , Sep 29, 2008 6:33PM
We don't believe in hatng the Indians for trying to take over the economy via financial market manipulations . Yes, China has taken the focus off for at least a decade but remember the words of Gandhi, although we can't for now.
Posted by guest , Sep 29, 2008 6:50PM
@4, that is the sausage factory known as politics. Tastes great but don't ask what goes into it or how it's made.
I believe this what McCain keeps alluding to when he says our political system is corrupt and broken.
But don't worry the bill will pass. All the nays just need some earmarks tacked on to it.
Posted by guest , Sep 29, 2008 6:54PM
Uh Hank, the Fed's calling. They want their Treasuries back.
Posted by mycoldcheese , Sep 29, 2008 6:54PM
can someone tell me why that government hasn't considered bailing out the taxpayer/the troubled homeowner instead? like a reversal of the trickle down theory where you get the banks to lend by backstopping their asset values by guaranteeing/subsidizing loan payments? bail out the homeowner, who in congress is going to say nay to that?
Posted by guest , Sep 29, 2008 6:55PM
Just ask Dick Fuld - mortgage securities are worth 105 cents on the dollar.... every stupid bastard knows that...
Posted by guest , Sep 29, 2008 6:57PM
Just burn down the foreclosed houses and move on. This plan is retarded, it deserved to be voted down.
Posted by Master of None , Sep 29, 2008 6:58PM
Seriously? People didn't realize this was the main issue?
The whole reason it's a "bailout" is the fact that both Paulson and Bernanke stated that the only way the plan works is to buy the securities at "something greater than market value."
It would be very easy to make sure there are no such abuses: facilitate 100% of the asset sales via reverse-auctions where the tranches of assets are homogeneous.
A further step would be to require private asset managers to participate to some degree. That would DAMN SURE guarantee Treasury gets a fair price.
Also, anyone who read the original bill can throw "coincidence" out the window. This was designed from the beginning to be the largest Golden Parachute in the history of modern financial markets.
Posted by guest , Sep 29, 2008 7:02PM
I am glad people are actually drilling down to what prices the Fed will pay for this stuff.... there are just so many variables involved.
Lets take a AAA Alt-A MBS. Ok, based on the collateral type and how the deal is performing, you have to predict how much the future losses are going to be. To do that, you have to predict how many loans are going to default and then how severe those losses are going to be.
Assuming you get this right, you then have to predict when those losses are going to hit the deal over time.
Finally, you have to run the remaining cash flows to some yield.
Unfortunately, there are still a ton of loans out there that haven't reset or (in the case of option arms) haven't recast. There is very little info to predict what will happen when people hit these gigantic future payshocks while also have negative equity in their homes.
Posted by guest , Sep 29, 2008 7:03PM
I am glad people are actually drilling down to what prices the Fed will pay for this stuff.... there are just so many variables involved.
Lets take a AAA Alt-A MBS. Ok, based on the collateral type and how the deal is performing, you have to predict how much the future losses are going to be. To do that, you have to predict how many loans are going to default and then how severe those losses are going to be.
Assuming you get this right, you then have to predict when those losses are going to hit the deal over time.
Finally, you have to run the remaining cash flows to some yield.
Unfortunately, there are still a ton of loans out there that haven't reset or (in the case of option arms) haven't recast. There is very little info to predict what will happen when people hit these gigantic future payshocks while also have negative equity in their homes.
Posted by guest , Sep 29, 2008 7:10PM
Posner raises valid points, all of them. The scenario he fails to address is to allow the Fed to step in and buy these securities at what is most assuredly a discount and let the financial institutions decide whether they would like to sell them or hold them. No one today may know the value of these securities but when the housing market finally bottoms out, whenever that may be, there will be a clear value. The problem is that the Govt. is the only entity that has the balance sheet to hold onto these assets in an illiquid market long enough for that to take place.
Merrill sold a block of its toxic assets at 0.22 on the dollar. Default rates would have to hit over 50% to make that pricing reasonable. Why did they do it? It got the assets off their balance sheet and allowed them to move forward. If the Treasury stepped in and bought assets at similar discounts, they will make money long-term.
Bottom line: The Treasury doesn't need to pay the "actual value" of the assets today. There is sufficient motivation for these entities to get the toxic assets off their balance sheets and with them being taken off they can feel comfortable lending to eachother again knowing that their counterparty wasn't going to go BK over night.
Posted by guest , Sep 29, 2008 7:11PM
Put a floor on real estate prices.
It's socialistic as all get out but at least it will keep the entire system from collapsing.
Posted by guest , Sep 29, 2008 7:17PM
Isn't the upside of taking the assets off the books at "actual value" the removal of much uncertainty regarding future solvency? Even if the govt doesn't overpay (thus recapitalize) financials won't it be much easier for them to raise private capital?
Posted by guest , Sep 29, 2008 7:28PM
Why isn't Liesman at home for the holiday?
Posted by redpandot , Sep 29, 2008 7:33PM
@14 but isn't the problem with the bill that securities are not in fact discounted?
Posted by guest , Sep 29, 2008 7:38PM
Government must buy new equity in troubled banks. Solves solvency and liquidity problems. May need to be in excess of $700bn - blank check time. Need higher regulated capital ratios and mark to marks - no hold to maturity accounting. Must skewer the rating agencies - biggest criminals in all of this.
Anything less, including the bailout voted down today, only delays the inevitable.
Posted by guest , Sep 29, 2008 7:54PM
The one "possible" flaw in his arguement is that cash is equal "capital" to these assets, which clearly isn't the case. Cash (a)is liquid and (b) can be reused as loans in the market. Swapping out an illiquid asset that no one wants with the ultimate liquid asset is one way to unfreeze the credit market.
But let me ask this - what's wrwong with allowing the banks a "one-time" write-off to flush these assets? Yes, it doesn't create liquidity, but cleans up the balance sheets and allows for fresh capital to be injected. There would need to be concessions (i.e. no tax loss carryforwards for this one-time writeoff), and the ratings agencies would have to be put on a leash for a while so the price of lending doesn't go through the roof, but this seems to me to be an infinitely easier way to get to the same conclusion.
Oh yeah, throw in some rate freeze/forgiveness to the homeowners to appease Main Street. The affect of this maneuver can be factored into the writeoff.
Posted by guest , Sep 29, 2008 8:03PM
@15 How would that work? Would the floor vary by region? By local economy? Would it be so high that no one would buy, so low that it wouldn't change anything, so random that it would create wasteful arbitrage and random wealth redistribution? What would the tax consequences be?
Or would it just be made of unicorn and socialist love?
Posted by guest , Sep 29, 2008 8:06PM
I think the dichotomy between equity investment and asset purchases is largely a false one. Either way, you're paying for assets that are difficult to value. The question is, would you rather be left with murky values within the overall bank or in a separate entity. I'd say the latter (i.e., the Paulson plan). That way, you get price discovery for the individual securities, and by offloading those securities you leave the banks more understandable and attractive to follow-on investors. If you just make equity investments, you're not clearing up much of the confusion and risk for the rest of the market.
Posted by guest , Sep 29, 2008 8:16PM
To address the value question:
I trade CDO, subprime mortgage bonds, alt-a, etc. for a living. These bonds require a lot of analysis to figure out the approximate value, and the "value" changes all the time. To analyze each bond you have to have the prospectus, monthly report (remit), and then come input assumptions for prepayment (CPR), default rate (CDR), and what you think the house sells for after the foreclosure process goes through (loss severity) and a bunch of other factors. All these factors past performance is reported but it is very tricky to extrapolate them and what estimates to apply varies a good bit. If you bot the bond assuming 2% CDR, 10% CPR, and 20% LS at par... do these people think it should still trade at par with 20% CDR, 5% CPR and 60% LS?
No one seems to be addressing that hedge funds, and private equity firms have raised and are looking to deploy billions of dollars to invest in these assets. Most of them have only spent a fraction of what they have to put to work. The way they bid these bonds seems pretty simply... imput all of the above assumptions and solve for 10-20% yield or usually 15%. This is the price the market usually bids for these bonds. It makes sense the market uses 15% bc risk has been repriced. Would you buy a CDO or subprime bond for 5%... no, of course not. You would require a 15%+ yield which gives room for margin of error.
If the fed pays more than where bonds are currently clearing than they will probably get a negative return because if you starting bidding bonds at 5% there is not a lot of margin for error and the fundamentals are deteriorating.
There are a TON of originally AAA rated bonds that are now worth ZERO... no chance of EVER getting principal or interest back. Where do you bid these bonds?
The problem is the holders of these bonds won't sell bc if they do, everyone from the portfolio manager on up is going to get fired.
Posted by guest , Sep 29, 2008 8:33PM
i'm with 20. the issue is liquidity. sure, if we're lucky, treasury will swap crap assets for their "real" value in cash, but that doesn't mean it's all a wash. right now, those assets are virtually useless to the banks, whereas cash is king.
Posted by guest , Sep 29, 2008 8:57PM
The only way that I see to clean this mess up is to recapitalize the homeowners and give them an incentive to pay back their mortgages.
Specifically:
1) Every mortgage that goes into short sale or foreclosure becomes a non- bankruptcy clearable debt of the homeowner -- if they default, the debt can be taken by garnisheeing the future wages /SS/estate of the mortgagee.
2) Because of the increased collateralization of mortgages, interest rates are now capped at T + 400
3) Mortgage interest is no longer tax deductable above 70%OLTV, and 400k.
4) Max mortgage leverage is 5-1 (20% down required), with lookback provisions to prevent mortgages based on bubble valuations.
5) No foreclosures for 6 months nationwide.
6) Prohibition of rent control nationwide.
7) Only 90% of a mortgage can be sold;originators have to maintain a risk position in all future originations.
This crushes the housing market, but should limit social issues arising from the fallout.
Posted by guest , Sep 29, 2008 9:14PM
@14 -- this is the devil's dilemna: the banks need to unload toxic crap, but if they do, they may make themselves technically and practically insolvent. sure, you resolve uncertainty, but i'm not sure anyone can afford to see clearly now the true values that #23 highlights.
does anyone really think that C, which has its own shitshow to deal with, would have consummated their deal with WB if they thought the TARP facility would be voted down? if either C or WB went down, ben would be in the helicopter tossing buckets of hundos that paulson printed...welcome to the world of hyper-inflation.
bottom line -- if there isn't a wholesale recapitalization, start hoarding ammo.
Posted by guest , Sep 29, 2008 9:30PM
Any thoughts on my legalize cannabis to rescure the economy idea?
'when the going gets weird the weird go pro' -HsT
-C
Posted by guest , Sep 29, 2008 9:41PM
Thanks for the hat tip.
Judge Posner has a long track record of identifying core problems at the eye of a maelstrom of controversy.
-Michael F. Martin
Posted by guest , Sep 29, 2008 10:01PM
Homeowners don't need the support.They have the income to make cash payments and delinquencies are not in crisis territory.It's banks that need their collateral stabilized,or an equity infusion.The CP and repo markets are what need the urgent attention today.
The collateral ie mortgages are adjusting to the lower level of the dollar ie higher inflation, that has worked through the capital markets the past 3 years.It's a brutal readjustment process but can be corrected by one of two things, and both will drive the dollar higher:massive coordinated G7 dollar buying to drive gold down below $650.Then an immediate capital gains tax cut of 30%.
What happened to Silicon Valley in 2002-2003 is hitting the financial sector.They suffered from deflation, we now are undergoing an inflation that crushes asset prices.Follow the same steps that broke the deflation back, but reverse them.Gold got to near $250 and it killed the telecoms.Gold went to over $1025 and it killed Bear,Lehman,Merrill and all those mortgages.
Posted by Finnegan , Sep 29, 2008 10:11PM
@26
(also, along with the ammo, get some land in the backwoods, snacks, seeds, gas, woman who knows how to can stuff and give you "end of society as we know it sex").
Posted by guest , Sep 29, 2008 10:50PM
Phobos- could you comment on #23? it sounds kinda like your googledocs spreadsheet
Posted by guest , Sep 30, 2008 1:11AM
@ 15
I hope you're kidding. Main street gets hit with inflation in just about everything except housing and their own income, and you want to put a floor under house prices? Try that, and watch transactions go to zero. So disconnected from reality, you must be from Wall St., or perhaps Washington?
Posted by guest , Sep 30, 2008 4:35AM
@8
I will speak slowly so that you can understand. The government can not give a "bailout" to homeowners because IT DOES NOT HAVE THAT MUCH MONEY (no, not even in Ft Knox).
Furthermore, if people who make $50k are squatting in a $750K home, there is moral hazard in rewarding that kind of poor financial stewardship in a "bailout" that would in effect be giving them the house they couldn't afford and shouldn't be living in.
The facts are that these people took absurd, outsized risk with borrowed money, hoping for a quick killing and the market turned on them, while the rest of us didn't.
Are you SURE you want all our tax dollars turned over to them so they can settle in more comfy and then sell later at a big profit when the market eventually turns?
Posted by guest , Sep 30, 2008 8:23AM
@25
Here's an incentive to pay your mortgage... pay up or find the biggest cardboard box you can get your hands on.