Financial Catastrophe

[Matt]

Ah yes, thank you, I missed that.

[Juggernaut GO]

I do agree with both of you that the lenders are responsible for taking advantage of the wrong people, but I also believe in some degree of personal responsibility.  

People have to be able to snap out of the semi-coma they are in with so much terrible information being thrown at them from every direction and make a decision on their own.

It's hard to say no when you have such a sweetheart deal in front of you. I know this first hand.  I was a victim of investment fraud to the tune of $45,000(20,000 of which I will never ever get back.)  I was in shock that I had been ripped off and I beat myself up over it for the better part of a year.  Was it my financial advisor's fault for ripping off his clients, DEFINITELY, and he will do jail time for it.  But I have to also put some blame in myself for it happening, because if I went with my instincts I would have never invested in anything other then a moneymarket account.

All of it really made me take a hard look at how we as a country do business with our investments.  I truly believe that these institutions are there to take advantage of as many people as possible while dangling the carrot on a stick of a modest return on their money in front of them as long as they can.

[wiley]

Getting a home loan is something that most people have to do once, maybe twice in their lifetimes. But the guy in charge of evaluating and approving loans - it's that guy's job to do this, and to do it dozens of times per day. If you're going to go handing out Blame Certificates, the only sensible (not to mention humane) way to do it is to put the lion's share with the loaners, not the borrowers. And really, you'd want to start with the people who pushed for the removal of the rules that used to prevent handing out bad loans like candy. 

If you're about to make the most important financial decision in your life, I'd expect that person to have an idea on what they can afford.  Books exist.  I'd wager there is a "home buying for dummies" out there somewhere for $14.99.

$14.36 after shipping.

I still say information like this should be provided by the government in the future as a preventative action, it seems much more feasible than bailing out the country from economic crashes every 20-60 years.

[Dr. Sylvan]

JuggernautGO: I was going to write lots of off-topic stuff about the nature of insurance, but I think Matt said it best.

I don't think you understand what insurance is (supposed to be/do).

"Insurance", as a concept, is not a problem. Insurance-for-profit, in a situation which incentivizes the maximization of profits to the exclusion of all else, is.

There is a direct relationship between the cost of health care and the cost of health insurance.

Is there some kind of imaginable universe where there is not a direct relationship between these two things? (If we're bringing up health insurance because of AIG, only 4.2% of their domestic "gross premiums written" in 2007 were for Accident & Health products.)

By paying this 700 billion dollars, the federal government is just the next jackhole investor looking to make a quick buck on the interest of the money put in(the bail out program is said to continue 1 full year.)   Where is the payback supposed to come from?  We are paying this money with no realistic way of ever getting it back.  If the corporations can't collect on the loans now, how are they magically going to come up with 700 billion dollars + interest in 1 calendar year.

This is not quite the case. The reason that financial companies have to sell the distressed loans at fire-sale prices is, while partly based on the actual portion of the loans that are delinquent, heavily based on an accounting rule known as "mark-to-market". While I'm not an accountant, my understanding is that the companies are required to report declines in the value of their assets exactly as if they were about to sell all of them immediately. So when there is almost no one willing to buy these securitized, toxic mortgages the company has to report them at the ultra-low prices that the few which are being sold have received.

These losses---which are largely hypothetical until/unless the company actually sells the asset---count against their "equity" which is their actual, available money. In order to keep things running, deal with investor redemption of deposits, etc., each company must maintain a certain equity relative to its liabilities, so these hypothetical losses lead to very real scrambles for cash in order to keep the gears turning. One of the reasons I've heard for Goldman Sachs and Morgan Stanley declaring themselves to be "regular" banks instead of investment banks over the weekend is that they can label some of their assets as "for investment", allowing them to avoid mark-to-market requirements while they hold them until the market is less catastrophic.

I guess what I'm driving at is that, instead of spending $700x10⁹, they could have changed an accounting rule, for instance by allowing companies to use some kind of "discounted cash-flow" valuation, which would allow them to value it based on original loan value times the percent of loans that are not delinquent. (As in, how bad it actually is, instead of how bad the market fears it might be.) But I guess 700 billion isn't that big a deal to a Congressman, so we're doing that instead.

[Matt]

I do agree with both of you that the lenders are responsible for taking advantage of the wrong people, but I also believe in some degree of personal responsibility.  

If I can follow up here: the other crucial fact being missed here is that the people who borrowed money to buy a home are NOT the people being bailed out. It's the PRIVATE COMPANIES that are being bailed out. That is crucial to understanding why this bailout is such a bad thing**.

The situation is:
(Homebuyer1, Homebuyer2, ..., Homebuyer1,000,000) all get loans from BankA, and are assured that as long as home prices rise, they can afford this payment plan (which is true) and that home prices are expected to keep rising (which was false).

BankA bundles those loans*, which it knows are likely to default if/when home values stop rising, and sells them (at a profit) to FinanceHouseB...

...who then resells that to FinanceHouseC, and so on down the line. The group that is getting bailed out is that last FinanceHouse in the chain, not the Homebuyers. AFAIK, there have been no plans put forth by anyone in a position to actually enact them which even mention the possibility of giving money to the Homebuyers. The closest any proposal comes is the fourth of Obama's points, which is that the government should restructure the terms of the loans so that the Homebuyers don't get kicked out of their new homes while they are paying off their debt. They still have to pay it all back, though.




*and to make matters worse, it bundles them in with some not-so-stinky loans too, making it harder to find out which loans, exactly, are the bad ones! This is compounded when the bundles of loans keep getting swapped around.


**and Henry Paulson's proposal is even worse than I expected, demanding virtually everything that most people hate about the bailout idea:
1. total control of $700,000,000,000 given to Paulson, subject to nearly ZERO review or oversight***
2. ability to spend this money buying up virtually any bad corporate investment, whether it's directly involved with this debacle or not,
3. including the bad investments of foreign banks [jawdrop],
4. preserving the ability of departing executives/employees (who are the people who actually made the poor investment decisions here) to receive generous 'golden parachutes',
5. the government gets no equity in the assets being bought [lolwut],
6. zero new regulation to prevent this from happening again in the future. I happen to agree with Bernie Sanders: any entity which is too big to fail is too big to exist. Time to get out the ol' Teddy Roosevelt-brand pruning shears.

Bonus Fun Fact: that $700BN number? That's not a one-time payment. The proposed Paulson rule is actually "the value of the assets the government takes over cannot exceed $700BN", meaning that as soon as any asset taken over is sold off, that frees up MORE money to spend buying up junk assets. Under his plan, we'll be cleaning up a lot more than $700BN worth of junk, just as long as we do it $700BN at a time.
It's just naked looting of the Treasury. Disgusting.


***Double Bonus Fun Fact: That amount of money would be "enough to get Hank invited to the G7 all by himself".

[Juggernaut GO]

All of your points is pretty much why I referred to this entire fiasco as the largest ponzi scheme ever masterminded, and the american taxpayer as a whole is about to become the final victim of it.

Exactly what you laid out is what happened first hand to my mother, with her mortgage being sold to 5 different financial institutions. 

Everyone has taken their own piece of the pie, nothing is left, and the last corporation left holding the bag is crying bankruptcy because they can't find anyone else to buy up the debt.

What happened to mortgage companies doing their fucking jobs, and financing actual mortgages instead of trying to turn a quick profit on every loan then moving it off.

[Demonic Attorney]

Travis, one quick point.  There is a proposal to revise bankruptcy law as part of the bailout bill to make it easier for homeowners to get out from under these insane ARMs.  That's in addition to the reference you provided about Obama's plan.  Under the proposed revisions, bankruptcy judges could gain the ability to modify mortgages to make them more manageable.

[Matt]

What happened to mortgage companies doing their fucking jobs, and financing actual mortgages instead of trying to turn a quick profit on every loan then moving it off.

What, indeed.

(Edited to remove some politics)

[Smmenen]

Travis, one quick point.  There is a proposal to revise bankruptcy law as part of the bailout bill to make it easier for homeowners to get out from under these insane ARMs.  That's in addition to the reference you provided about Obama's plan.  Under the proposed revisions, bankruptcy judges could gain the ability to modify mortgages to make them more manageable.

Which would do very little.  Only a small percentage of people in foreclosure are in bankruptcy or should declare bankruptcy.    Still, it's something. 

[JACO]

I do agree with both of you that the lenders are responsible for taking advantage of the wrong people, but I also believe in some degree of personal responsibility.  

If I can follow up here: the other crucial fact being missed here is that the people who borrowed money to buy a home are NOT the people being bailed out. It's the PRIVATE COMPANIES that are being bailed out. That is crucial to understanding why this bailout is such a bad thing**.

The fault lies everywhere, not just with the lenders and the originators of the loans. There should be no 'bail out' of any sorts, as that just skirts the accountability of all parties involved. As a good friend of mine says, "you don't trim a dead tree; you let it die."

The people borrowing the money, who wanted to buy a house and risked riding the equity wave which does not just keep going up, are at fault because they made a poor investment decision. You don't have to be a genius to figure out that you can't afford a $450,000 house in southern California when you make $45,000 a year. They made a bad investment, often without educating themselves of the risks and pitfalls of mortgages, or the situations they were getting themselves into.

The lenders and originators of loans were willing to take a short term risk of lending people money with little credit or no income verification (among many other examples or problematic borrowers), and 'bundled' the riskier loans with less risky loans, to ultimately be resold to another investment group.

The banks and other investment groups that frankly didn't do enough research on what they were investing in, and deserve to lose their asses. They could easily do research on the loans they were buying up, yet they didn't do their due diligence in most cases, and ended up getting burned as a result. They also made a bad investment, often without educating themselves of the risks and pitfalls of the shaky mortgages they were buying.

These people should not be 'bailed out' because they made poor investments, nor should banks, automobile manufacturers, insurance companies, airlines, or any other private businesses. Most of these companies have faulty business models or have made numerous missteps, and throwing more money at them will not solve the problem. Rewarding incompetent decisions will exacerbate the problem, and drive our nation further into debt as we become more socialist.

[bluemage55]

I guess what I'm driving at is that, instead of spending $700x10⁹, they could have changed an accounting rule, for instance by allowing companies to use some kind of "discounted cash-flow" valuation, which would allow them to value it based on original loan value times the percent of loans that are not delinquent. (As in, how bad it actually is, instead of how bad the market fears it might be.) But I guess 700 billion isn't that big a deal to a Congressman, so we're doing that instead.

I doubt that any change of accounting rules would work here.  While what you described was mostly correct, a more accurate summary is below:

1. Major financial institutions have bought a lot of "bad debt".
2. Said debt has declined greatly in value.
3. With much of their money invested in this bad debt, which as lost a lot of value, the financial instititions now have significantly lowered assets.
4. Said firms also owe a lot of money, that they have borrowed using their assets as collateral.
5. With their assets significantly reduced, they now have to put up more collateral (which they don't have) to maintain those loans to others.
6. Unable to put up new collateral, the firms default.

So the big problem isn't a matter of accounting.  It's the fact that the assets of the firm have greatly decreased in market value.

[Smmenen]

I do agree with both of you that the lenders are responsible for taking advantage of the wrong people, but I also believe in some degree of personal responsibility.  

If I can follow up here: the other crucial fact being missed here is that the people who borrowed money to buy a home are NOT the people being bailed out. It's the PRIVATE COMPANIES that are being bailed out. That is crucial to understanding why this bailout is such a bad thing**.

The fault lies everywhere, not just with the lenders and the originators of the loans. There should be no 'bail out' of any sorts, as that just skirts the accountability of all parties involved. As a good friend of mine says, "you don't trim a dead tree; you let it die."

The people borrowing the money, who wanted to buy a house and risked riding the equity wave which does not just keep going up, are at fault because they made a poor investment decision. You don't have to be a genius to figure out that you can't afford a $450,000 house in southern California when you make $45,000 a year. They made a bad investment, often without educating themselves of the risks and pitfalls of mortgages, or the situations they were getting themselves into.

The lenders and originators of loans were willing to take a short term risk of lending people money with little credit or no income verification (among many other examples or problematic borrowers), and 'bundled' the riskier loans with less risky loans, to ultimately be resold to another investment group.

The banks and other investment groups that frankly didn't do enough research on what they were investing in, and deserve to lose their asses. They could easily do research on the loans they were buying up, yet they didn't do their due diligence in most cases, and ended up getting burned as a result. They also made a bad investment, often without educating themselves of the risks and pitfalls of the shaky mortgages they were buying.

These people should not be 'bailed out' because they made poor investments, nor should banks, automobile manufacturers, insurance companies, airlines, or any other private businesses. Most of these companies have faulty business models or have made numerous missteps, and throwing more money at them will not solve the problem. Rewarding incompetent decisions will exacerbate the problem, and drive our nation further into debt as we become more socialist.

Let's not forget the servicers and brokers.  The servicers, the companies hired by the mortgage holders to manage the mortgage payments, are not particularly interested in the well being of the homeowner or the investors either. They make more money when the homeowner is saddled with late payments and other ancillary fees. Forbearance agreements are onerous and tend to accelerate foreclosure rather than stave it off.   The mortgage broker earned an brokerage fee, typically $2500, and then made that money again when the homeowner refinanced, which they were forced to do in order to avoid the ARM reset. 

[bluemage55]

These people should not be 'bailed out' because they made poor investments, nor should banks, automobile manufacturers, insurance companies, airlines, or any other private businesses. Most of these companies have faulty business models or have made numerous missteps, and throwing more money at them will not solve the problem. Rewarding incompetent decisions will exacerbate the problem, and drive our nation further into debt as w become more socialist.

While this fiasco should indeed serve to educate people, the problem is that a bailout of some sort is necessary in this particular scenario.  The unforunate fact is that the entire financial system is on the precipe of collapse.  While I am equally disgusted at the idea of rewarding idiotic investments with corporate welfare, there is no choice for us as a nation at this point.

So, fair or not, something needs to be done.  The only question is if we can do it in such a way that actually works to prevent future crises of these sorts from happening.

I would personally suggest that the firms on the recieving end of bailout money to not be given free money, but instead be handed long-term, low-interest loans that they can eventually repay. This way, we can perhaps emerge from the crises with lower national debt, and the finance industry will understand that incompent greed does not go unpunished.  That alongside undoing the deregulation of the last decade would probably do wonders for the United States.

Then again, given the amount of money large businesses put into lobbying, I'd be supremely surprised if such occured.

[JACO]

Let's not forget the servicers and brokers.  The servicers, the companies hired by the mortgage holders to manage the mortgage payments, are not particularly interested in the well being of the homeowner or the investors either. They make more money when the homeowner is saddled with late payments and other ancillary fees. Forbearance agreements are onerous and tend to accelerate foreclosure rather than stave it off.   The mortgage broker earned an brokerage fee, typically $2500, and then made that money again when the homeowner refinanced, which they were forced to do in order to avoid the ARM reset.

Is it your contention then that the servicers and brokers and mortgage companies should be 'particularly interested in the well being of the homeowner or investor' then? As businesses, their particular interest should be (and usually is) to make money. They are offering a service which someone chose to purchase/invest/use. The real reason they should possibly be interested in the 'well being of the homeowner or investor' is to potentially be rewarded with repeat business, if they meet the expectations of the homeowner or investor. Other than that, there is no reason for them to be interested in the well being of the consumer. They stand to make more money if the consumer is a fuckup and frequently pays their bills late (but eventually pays them).

While this fiasco should indeed serve to educate people, the problem is that a bailout of some sort is necessary in this particular scenario.  The unforunate fact is that the entire financial system is on the precipe of collapse.  While I am equally disgusted at the idea of rewarding idiotic investments with corporate welfare, there is no choice for us as a nation at this point.

So, fair or not, something needs to be done.  The only question is if we can do it in such a way that actually works to prevent future crises of these sorts from happening.

I disagree entirely. A 'bail out' is not necessary, as it only works to prop up a failing system. By this logic, we should actually 'bail out' automakers like Ford and GM as well, because their incompetence could lead to the collapse of the entire American auto industry. By the same logic we should 'bail out' failing airlines as well, because their poor business models and execution could lead to the collapse of the airline industry.

Realistically, it will not. Someone will step in to fill the void, as there will still be a market for banking, automobiles, flights, and whatever other services are provided by these poorly run failing companies. The weakest strategies and business practices will drive those that use them to bankruptcy, and the businesses with the most discipline, best business models, and the best ideas/execution/application will be the ones left standing.

[bluemage55]

I disagree entirely. A 'bail out' is not necessary, as it only works to prop up a failing system. By this logic, we should actually 'bail out' automakers like Ford and GM as well, because their incompetence could lead to the collapse of the entire American auto industry. By the same logic we should 'bail out' failing airlines as well, because their poor business models and execution could lead to the collapse of the airline industry.

Realistically, it will not. Someone will step in to fill the void, as there will still be a market for banking, automobiles, flights, and whatever other services are provided by these poorly run failing companies. The weakest strategies and business practices will drive those that use them to bankruptcy, and the businesses with the most discipline, best business models, and the best ideas/execution/application will be the ones left standing.

Your disagreement is based on rhetoric and ideology.  I am not arguing that bailouts are a good thing, nor am I arguing that they are necessary in other situations. 

What I am arguing, and you will find leading economists to back up these arguments, is that if a bailout does not happen here, the financial system will collapse.  The banking firms will default, leading to $62 trillion of credit swap defaults, leading to the the bankruptcy of virtually all financial institutions.  Following this would be a depression resulting from virtually no lending for people and businesses.

There will not be anyone to fill the void, because there will not be anyone with the money to do so.  The only result of doing nothing is utter ruin.

[Tha Gunslinga]

As a good friend of mine says, "you don't trim a dead tree; you let it die."

The problem here is that if you let the tree die, it falls on your house.

[Matt]

The people borrowing the money, who wanted to buy a house and risked riding the equity wave which does not just keep going up, are at fault because they made a poor investment decision. You don't have to be a genius to figure out that you can't afford a $450,000 house in southern California when you make $45,000 a year. They made a bad investment, often without educating themselves of the risks and pitfalls of mortgages, or the situations they were getting themselves into.

So what? We can debate whether the investment companies should get bailed out or not - that's a debate we can have. But my point is that any discussion of the "irresponsibility" of the people taking out home loans has no place here - is a complete strawman and entirely irrelevant to the discussion, since no one is actually proposing they be bailed out. No one. The only reason to bring it up is to juxtapose their treatment with the treatment of all the other players, who ARE likely to have their debts forgiven (or backed by the US government).

(Exactly why it should be that certain parties are willing to bail out one kind of actor in this mess and not another is a worthwhile line of questioning, but it veers away from finance and directly into naked political discussion.)

[JACO]

I disagree entirely. A 'bail out' is not necessary, as it only works to prop up a failing system. By this logic, we should actually 'bail out' automakers like Ford and GM as well, because their incompetence could lead to the collapse of the entire American auto industry. By the same logic we should 'bail out' failing airlines as well, because their poor business models and execution could lead to the collapse of the airline industry.

Realistically, it will not. Someone will step in to fill the void, as there will still be a market for banking, automobiles, flights, and whatever other services are provided by these poorly run failing companies. The weakest strategies and business practices will drive those that use them to bankruptcy, and the businesses with the most discipline, best business models, and the best ideas/execution/application will be the ones left standing.

Your disagreement is based on rhetoric and ideology.  I am not arguing that bailouts are a good thing, nor am I arguing that they are necessary in other situations. 

What I am arguing, and you will find leading economists to back up these arguments, is that if a bailout does not happen here, the financial system will collapse.  The banking firms will default, leading to $62 trillion of credit swap defaults, leading to the the bankruptcy of virtually all financial institutions.  Following this would be a depression resulting from virtually no lending for people and businesses.

There will not be anyone to fill the void, because there will not be anyone with the money to do so.  The only result of doing nothing is utter ruin.

Actually it's not based on ideology, but reality. You can find an economist to argue anything you want, including that socialism is the best principle to run a country. That doesn't mean it's the best in practice.

The financial system will not collapse if a bunch of banks are bailed out, so I don't know where you're getting your information from. There are over 850 banks in this country alone that the FDIC insures, and something like 12 of them are on the FDIC's watch list. Most banks are not in trouble, and most will not default. There are still plenty of dollars to go around, and even when some of the big players (i.e. Washington Mutual) might go belly up, it's not going to cause a national crisis. It will take longer for those people to get their money, but it's not going to cause a complete collapse of the banking industry. You've been hitting the Paulson and Bernake purple drink pretty hard, it seems. I'm not sure you understand the root cause of the problems. 

As for credit default swaps (CDS), banks and other investors made risky investments along those lines, which for the past few years up until now were viewed as 'safe bets' because the housing market kept zooming ahead. Those people should not be bailed out either. It's similar to betting the wrong way often enough, and finally getting burned on a risky bet. If a company has leveraged so heavily on CDS and bet the wrong way often enough, they deserve to lose their asses too. Perhaps you would like to do a bit more reading on the subject.

[Smmenen]

Let's not forget the servicers and brokers.  The servicers, the companies hired by the mortgage holders to manage the mortgage payments, are not particularly interested in the well being of the homeowner or the investors either. They make more money when the homeowner is saddled with late payments and other ancillary fees. Forbearance agreements are onerous and tend to accelerate foreclosure rather than stave it off.   The mortgage broker earned an brokerage fee, typically $2500, and then made that money again when the homeowner refinanced, which they were forced to do in order to avoid the ARM reset.

Is it your contention then that the servicers and brokers and mortgage companies should be 'particularly interested in the well being of the homeowner or investor' then? As businesses, their particular interest should be (and usually is) to make money.

No, my point was that the incentives are currently structured badly.    Back in the day, the originating back owned the mortgage AND serviced the loan.  Their livelihood depended on the home-owner doing well.   Incentives were aligned properly.  Now, the parties are all out to make a quick buck without regard to the well-being or long term interest of the homeowner.   

[West]

A major cause of the crisis are incentives, as Smmenen is arguing, but not because there isn't enough altruism going around. Something that hasn't been mentioned (though I haven't read every word of every post) are the government incentives that encouraged these sub-prime loans in the first place. For an alternate point of view, read into this: http://www.forbes.com/2008/07/18/fannie-freddie-regulation-oped-cx_yb_0718brook.html

[Dr. Sylvan]

bluemage55: Thanks for the clarification. I can remember reading more about the collateral issue in March surrounding Bear Stearns' potential declaration of bankruptcy. My understanding is that the issue of collateral was a much bigger deal for the investment banks than commercial banks, with the exception of mortgage-heavy banks like WaMu. I would rather Paulson hadn't taken this latest, $700B step, in favor of recapitalization, now that MS and GS are both explicitly deleveraging to become "normal" banks.

Matt: There has been some mention of forced reduction in debt for individual homeowners. Ben Bernanke actually at one point earlier this year suggested publicly that banks should unilaterally reduce the debt on their mortgages so that fewer homeowners would be "upside-down", owing more than the home's current value. He was suggesting it as a way to prevent people from just walking away from the loan that they could never recover the cost on. There are a couple of Democratic Senators/Reps that try to work homeowners into the mix, but not many. (I think it's Sen. Dodd and Rep. Frank that I've heard of.)

Also, the securization of loans was even more obtuse than your explanation. The "Collateralized Debt Obligations" and "Structured Investment Vehicles" were divided into "tranches". The lower tranches paid higher interest, but if some of the mortgages in the pool of a particular CDO defaulted, the lowest tranche would stop paying off first. The highest tranches, on the other hand, could get a perfect AAA rating based on a computer model of the risk that they would default. The model, of course, was based on past subprime loans, which were made after getting things like proof of income, down payments, etc., which went out of fashion in 2005.

This pool of many mortgages would be hard enough to understand, mixed in with the "tranche" concept of who-gets-paid-first, and then the finance whizzes innovated one step further to create pools of the pools. These were basically impossible to understand even for sophisticated investors, who short-circuited their due diligence and simply believed the credit rating assigned by Moody's/Fitch/S&P.

JACO: In the absence of the bailouts I defended earlier in this thread, the armageddon being warded off would become very real. Let's say they had let Fannie and Freddie default. Fannie and Freddie hold or guarantee over a THIRD of all residential mortgage debt in the United States. It seems obvious that such an event would affect lending nationwide. Not to mention jeopardizing the creditworthiness of the US government itself, since they have always been known as Government-Sponsored Enterprises. You can make an argument that AIG and even Bear could have been allowed to fail unaided, but Fannie and Freddie were allowed, with Congress's encouragement, to grow far too important to fail.

I do, as I've noted, agree with the general view in the thread that Paulson's Blank Check is a bridge too far. The cost would not be as high as the headline number because only some of the loans will default, but what makes me reject it is that it is like carpet-bombing forgiveness to Wall Street, unlike his earlier case-by-case moves which rightly wiped out shareholders and will near-certainly result in the dissolution of the bailed-out companies.

[Matt]

I think Chuck Schumer made a good point (shocking, I know!): Treasury says that they'll need about $50BN per month, so why do they have to have all $700BN NOW NOW NOW right NOW? It makes a lot more sense to sign over $150BN and just reconvene in three months.

Paulson's answer was that the entities looking to be bailed out needed to see all $700BN up front in order to feel secure that the money would keep coming. Which was, needless to say, pure BS. If these companies were over SUCH a barrel as they claim, you'd think they'd be making a lot fewer demands. The whole thing stinks to high heaven IMO. I could be convinced that a bailout is needed but noooo way do I believe it needs to be done ASAP.

[Smmenen]

Yeah.   The greater the hyperbole, the less I buy the doomsday prognostications.    They are selling it too hard.  It's way over the top.   IF YOU DON'T DO A BAILOUT, WE ARE DOOMED!!  I mean, give me a break.  Reality check.  Scare tactics to shove a bad bill down our throats.   

Maybe no bailout would incentivize the banks to actually make sure that the loans are renegotiated rather than let them just go bad, wipe the slate clean and start over. 

[Concentration]

JuggernautGO: I was going to write lots of off-topic stuff about the nature of insurance, but I think Matt said it best.

I don't think you understand what insurance is (supposed to be/do).

"Insurance", as a concept, is not a problem. Insurance-for-profit, in a situation which incentivizes the maximization of profits to the exclusion of all else, is.

There is a direct relationship between the cost of health care and the cost of health insurance.

Is there some kind of imaginable universe where there is not a direct relationship between these two things? (If we're bringing up health insurance because of AIG, only 4.2% of their domestic "gross premiums written" in 2007 were for Accident & Health products.)

By paying this 700 billion dollars, the federal government is just the next jackhole investor looking to make a quick buck on the interest of the money put in(the bail out program is said to continue 1 full year.)   Where is the payback supposed to come from?  We are paying this money with no realistic way of ever getting it back.  If the corporations can't collect on the loans now, how are they magically going to come up with 700 billion dollars + interest in 1 calendar year.

This is not quite the case. The reason that financial companies have to sell the distressed loans at fire-sale prices is, while partly based on the actual portion of the loans that are delinquent, heavily based on an accounting rule known as "mark-to-market". While I'm not an accountant, my understanding is that the companies are required to report declines in the value of their assets exactly as if they were about to sell all of them immediately. So when there is almost no one willing to buy these securitized, toxic mortgages the company has to report them at the ultra-low prices that the few which are being sold have received.

These losses---which are largely hypothetical until/unless the company actually sells the asset---count against their "equity" which is their actual, available money. In order to keep things running, deal with investor redemption of deposits, etc., each company must maintain a certain equity relative to its liabilities, so these hypothetical losses lead to very real scrambles for cash in order to keep the gears turning. One of the reasons I've heard for Goldman Sachs and Morgan Stanley declaring themselves to be "regular" banks instead of investment banks over the weekend is that they can label some of their assets as "for investment", allowing them to avoid mark-to-market requirements while they hold them until the market is less catastrophic.

I guess what I'm driving at is that, instead of spending $700x10⁹, they could have changed an accounting rule, for instance by allowing companies to use some kind of "discounted cash-flow" valuation, which would allow them to value it based on original loan value times the percent of loans that are not delinquent. (As in, how bad it actually is, instead of how bad the market fears it might be.) But I guess 700 billion isn't that big a deal to a Congressman, so we're doing that instead.

Some of this is factually incorrect, but even if it were totally correct factually, it misses the bigger picture.  First of all, equity is not the same as cash on hand, not even close.

Second, these financial institutions are not insolvent because of a mere oddity of definition or reporting requirements.  "Stringency" of reporting standards is a punchline.  As you said there is no one to buy these "toxic" assets, with toxic being the operative word. 

Whether that means in the long run they have no value couldn't matter less.  "The market" is an exercise in mass psychology.  A 1% loss in equity is all she wrote.

As for "must maintain a certain equity-to-liabilities" ratio, sure if you mean that they're leveraged 50 or 100 times over..

[Juggernaut GO]

At this point I don't even give a shit any more.  Let it all burn down fuck it.  Threatening a great depression if we don't give them the money is stupid and you know what, let it happen.  The whole system needs to be reset.  People will still gamble, casino's will still be in business, and I will still make a living so who gives a fuck if a bunch of white collar people who cheat the system day in and day out lose their jobs.  They can jump out a window.

These corporations got themselves into this mess, they can go bankrupt and steal everyones pensions on the way out for all I care.

[LotusHead]

A long time ago I  found out that money was just peices of paper, and the bulk of "US currency" was just ones and zeroes in some data file on a computer.

No, I have no answers, but something tells me that the concept of "money" just helps the people who have a lot of it.

700Billion is too big for me to digest.

I just work, pay my taxes and hope society doesn't spiral downward.

[bluemage55]

Actually it's not based on ideology, but reality. You can find an economist to argue anything you want, including that socialism is the best principle to run a country. That doesn't mean it's the best in practice. 

I'm not talking about a single economist.  The majority of all economists in the world agree that some sort of intervention is necessary to prevent the most devastating recession since World War II.

And no one on this forum is arguing for socialism, your neoconservative straw mans to the contrary.

The financial system will not collapse if a bunch of banks are bailed out, so I don't know where you're getting your information from. There are over 850 banks in this country alone that the FDIC insures, and something like 12 of them are on the FDIC's watch list. Most banks are not in trouble, and most will not default. There are still plenty of dollars to go around, and even when some of the big players (i.e. Washington Mutual) might go belly up, it's not going to cause a national crisis. It will take longer for those people to get their money, but it's not going to cause a complete collapse of the banking industry. You've been hitting the Paulson and Bernake purple drink pretty hard, it seems. I'm not sure you understand the root cause of the problems. 

You're the one who fails to understand the enormity of the problem.  And to make myself clear, if I have not done so already, I never advocated in favor of the current bailout plan being proposed by Paulson.  I fully agree with you that it is unfair to subsidize poor investments with taxpayer money and I'm terrified at the lack of oversight of the current bill, which gives Paulson unprecedented power for an unelected official, and unconsitutionally puts him above the review of any court (which rankles the sensibilities of anyone with a legal background).

The argument that I am making, which is undisputed by the majority of leading economists, is that some sort of intervention is necessary to avert a prolonged double digit recession.

As for credit default swaps (CDS), banks and other investors made risky investments along those lines, which for the past few years up until now were viewed as 'safe bets' because the housing market kept zooming ahead. Those people should not be bailed out either. It's similar to betting the wrong way often enough, and finally getting burned on a risky bet. If a company has leveraged so heavily on CDS and bet the wrong way often enough, they deserve to lose their asses too. Perhaps you would like to do a bit more reading on the subject.

I'm fully aware of what CDS's are.  What you may not be aware of is their potential to magnify the current crisis.

[Grand Inquisitor]

The argument that I am making, which is undisputed by the majority of leading economists, is that some sort of intervention is necessary to avert a prolonged double digit recession.

You mean right now?  What about in a year or five or fifteen?  Capitalist systems are cyclical (mostly because they're run by people).  We've tried to cheat this cycle for a few decades.  We can put up a few more maginot lines, or we can just take what's coming to us and start addressing real issues of economy.  I'm with Travis about starting now.


Also...

http://www.forbes.com/home/2008/09/23/bailout-paulson-congress-biz-beltway-cx_jz_bw_0923bailout.html

"It's not based on any particular data point," a Treasury spokeswoman told Forbes.com Tuesday. "We just wanted to choose a really large number."


http://img213.imageshack.us/img213/5915/lolfatcatsjq3.jpg


(Can someone PM me on how to do hyperlinks where the text is something different than the link?  Thx)

[bluemage55]

You mean right now?  What about in a year or five or fifteen?  Capitalist systems are cyclical (mostly because they're run by people).  We've tried to cheat this cycle for a few decades.  We can put up a few more maginot lines, or we can just take what's coming to us and start addressing real issues of economy.  I'm with Travis about starting now.

Now is a terrible time to start.  It's not really a good idea to willingly undertake a depression when the national debt is already sky-high, and while embroiled in multiple (expensive) foreign conflicts.  Back in 2001 when we had a nice fat budget surplus would have been a good time.  Now is not.

I don't disagree that the past decade or two of fiscal deregulation is what got us here.  That said, it makes much more sense to me to be pragmatic about the situation.  What's done is done.  The best we can do now is pick up the pieces, and in the future work to make sure it doesn't happen again.  Preventing a global depression is a good way to start.

http://www.forbes.com/home/2008/09/23/bailout-paulson-congress-biz-beltway-cx_jz_bw_0923bailout.html

"It's not based on any particular data point," a Treasury spokeswoman told Forbes.com Tuesday. "We just wanted to choose a really large number."

I think pretty much everyone has already figured out that Paulson's plan is a bad one.  That doesn't mean that a better plan isn't possible.

[Grand Inquisitor]

Now is a terrible time to start.  It's not really a good idea to willingly undertake a depression when the national debt is already sky-high, and while embroiled in multiple (expensive) foreign conflicts.  Back in 2001 when we had a nice fat budget surplus would have been a good time.  Now is not.

Can you explain how a budget surplus has anything to do with when is a better time to have a recession/depression?  All of the recent bubbles have been global capital flows moving to whatever spot recent legislative changes made most appealing for the US consumer.

the past decade or two of fiscal deregulation is what got us here

Nope.  What got us here is becoming a nation of debtors.  We need is deflation and to start producing.