Re: Bailout

[David Farber <dave () farber net>]

Begin forwarded message:

From: "Dave Wilson" <dave () wilson net>
Date: October 6, 2008 8:29:39 AM EDT
To: dave () farber net
Subject: Re: [IP] Re: Bailout

Speaking solely for myself, Mr. Riley has it right and Mr. Glass --  
relying on a completely backward assessment by Bill Gross, one of the  
guys who got us into this mess -- is wrong. Bernanke and Paulson will  
not be buying assets at below market prices. Far from it. They believe  
mortgage backed assets have been underpriced by the market, and thus  
will be paying premium prices. Here's Bernanke's explanation:

Federal Reserve Board chairman Ben Bernanke said that criticism of the  
$700 billion plan proposed by Treasury Secretary Henry Paulson  
overlooked a key ingredient: it is designed to avoid forcing banks to  
sell or value their mortgage assets at a "fire-sale" price. In a  
harsher tone than he has ever used in testimony, Bernanke spelled out  
the benefits that would accrue when the government can buy these  
mortgage assets at close to "hold to maturity" prices instead of the  
fire-sale price. Banks would have a basis for valuing the assets and  
won't have to use fire-sale prices and their capital won't be  
unreasonably marked down, he said. Liquidity should begin to come back  
to the markets and uncertainty should dissipate. Credit markets should  
start to unfreeze, he said. If the assets are purchased near the true  
hold to maturity prices, taxpayer losses should be minimal, he said
http://www.marketwatch.com/news/story/avoiding-fire-sale-price-key-paulson/story.aspx?guid= 
{BE116D8A-C118-48FE-938C-2D43070424BC}&dist=msr_4

By paying the hold to maturity price, the government is asserting that  
the paper is not in fact overvalued (everybody else believes the paper  
is overpriced, which is of course why nobody else wants to buy it).

Here's a direct quote from Bernanke's testimony:
I believe that under the Treasury program, auctions and other  
mechanisms could be devised that will give the market good information  
on what the hold-to-maturity price is for a large class of mortgage- 
related assets. If the Treasury bids for and then buys assets at a  
price close to the hold-to-maturity price, there will be substantial  
benefits.

First, banks will have a basis for valuing those assets and will not  
have to use fire sale prices. Their capital will not be unreasonably  
marked down …

http://krugman.blogs.nytimes.com/2008/09/23/getting-real/

I share the lack of enthusiasm for risking taxpayer assets in this  
venture, but I see that as inevitable (and I'm not especially worried  
so long as public investment leads to equity in the firms being  
propped up, which should offer some return down the road). The  
alternative -- let them fail -- would be much worse. We are already  
seeing extremely large companies unable to order merchandise for the  
Christmas season because they have no available lines of credit. This  
sort of thing is catastrophic to all of us: The people who would  
otherwise be making the stuff that never got ordered lose their jobs;  
the people hired to sell the stuff lose their jobs; the people  
involved in the various components related to shipping, storing,  
selling, and delivering that stuff lose their jobs. All these people  
who have lost their jobs cut back on purchases, leading to job losses  
at grocery stores, pharmacies, etc. Those job losses lead to job  
losses and closings at places like a dentist's office, daycare, and  
the guy who fixes your car.

In addition to the manufacturing and sale of actual stuff, many if not  
most medium size and larger entities -- corporations and non-profits  
as well as state and local governments -- with any significant payroll  
use low-cost, short term loans to make sure there's cash available in  
the bank every payday. Those loans are increasingly difficult to get,  
meaning all these entities will have to keep more of their assets in  
liquid form to ensure that paychecks don't bounce. Since everybody  
else is also trying to sell assets to get cash to cover their  
positions, this is driving prices down still further for everyone,  
which exacerbates the underlying issues.

I think, in an effort to prevent a real market panic the  
administration has not explained precisely what this sort of credit  
freeze leads to, which has left the vast majority of people with the  
idea that this measure is aimed merely at propping up Wall Street. The  
truth is, if Wall Street stops lending, Main Street goes down with  
it....

-dave


On Sun, Oct 5, 2008 at 9:20 PM, David Farber <dave () farber net> wrote:


Begin forwarded message:

From: "Ronald J Riley \(RJR-com\)" <rjr () rjriley com>
Date: October 5, 2008 8:23:12 PM EDT
To: <dave () farber net>
Subject: RE: [IP] Bailout


"Incidentally, the press has done a dreadful job of reporting what the  
$700G
bailout actually is.  It's not a gift to Wall St, unless Hank Paulson  
acts
unusually stupidly.  It's basically a big bank to buy up those  
unpriceable
mortgages.  The plan is the Treasury buys a whole lot of mortgage  
paper at a
discount in return for cash, so the banks now know how much money they  
have,
then after it becomes possible to figure out what the mortgages are  
worth,
they sell them, quite possibly at a profit."

My concern is that these mortgages will be bought for far more than  
they are
actually worth and we the taxpayers will be shafted once again.

Virtually all the blame for this mess belongs to the idiots in the  
industry.
They did not have to loan money to people who could not afford them.

They bottom line is that we have a glut of houses available and tight
credit.  Few buyers and many sellers.  This is a buyer's market, more so
then anything I have ever seen in my life.

It is my feeling that due to excessive supply, few buyers, inflated book
values and other factors that most foreclosed properties are worth no  
more
than a third of the SEV, which includes deducting the costs of any  
repairs
which may be required from the offer.  That is the reality of today's
market.

Personally, I am really fed up with bail outs for high roller shysters  
and I
think that we really need to put our collective foot down and demand  
that
corporate interests become responsible  and ethical.  Far to many are
neither today.

Ronald J. Riley,


Speaking only on my own behalf.
Affiliations:
President - www.PIAUSA.org - RJR at PIAUSA.org
Executive Director - www.InventorEd.org - RJR at InvEd.org
Senior Fellow - www.patentPolicy.org
President - Alliance for American Innovation
Caretaker of Intellectual Property Creators on behalf of deceased  
founder
Paul Heckel
Washington, DC
Direct (202) 318-1595 - 9 am to 9 pm EST.

-----Original Message-----
From: David Farber [mailto:dave () farber net]
Sent: Sunday, October 05, 2008 7:31 PM
To: ip
Subject: [IP] Bailout



Begin forwarded message:

From: John Levine <johnl () iecc com>
Date: October 5, 2008 6:48:51 PM EDT
To: dave () farber net
Cc: Brett Glass <brett () lariat net>
Subject: Re: [IP] Bailout

Such a bill would have gone to the source -- bad real estate loans
foisted upon homeowners by irresponsible lenders -- by doing
everything possible to prevent the borrowers from having to default,
thus salvaging as much of the value of those loans as possible. This
would have helped both ordinary citizens -- by helping them to keep
their homes and preventing a continuing downward spiral in real estate
prices -- and the banks who held securities backed by those loans. ...

I'm sorry, but this is way too simplistic and misses some of the key
problems that make the financial situation so tough.  This is not to  
deny
for a moment the greed and excess that went on both in Wall St and in  
banks
in general, but it ain't just foreclosures.

The first key problem is that in a lot of the country, housing prices  
are
still unrealistically high.  Historically, housing prices have tracked  
both
rental prices and incomes pretty closely.  They track rents because
landlords have to pay their carrying costs from the rent they charge,  
and
they track overall income because in a sane market the amount that  
people
can pay for a house is limited by the mortgage payment they can  
afford.  By
these yardsticks, markets like San Diego and Miami are still  
overpriced, and
no matter what we might try to do, they're going to drop until the
fundamentals make sense again.

The second key problem is that there were a lot of irresponsible  
borrowers
to go with the irresponsible lenders.  Some of the people facing  
foreclosure
would be OK if their house were marked down to a realistic price and the
mortgage marked down to match, but the no-documentation loans (NINJA,  
for No
Income, No Job or Assets) generally couldn't afford their houses under  
any
scenario short of an endless bubble.  Somehow we have to figure out  
how to
tell these two groups apart, and treat them differently.  I have no  
interest
in punishing people who got into houses they can't afford, but I'm  
equally
uninterested in providing them permanent subsidies to pay their  
mortgages.

Finally, the problem that the bailout is facing in the short run is not
mortgage default, but bank liquidity.  If banks knew what the houses
underlying their mortgages were worth, and what the incomes of the  
owners
were, they could figure out what the mortgages were worth, and there'd  
be a
market for them.  But since at this point they know neither, there's no
market, banks don't know how much capital they'll have left after it  
shakes
out, and they don't dare make new loans to anyone, no matter how
creditworthy, which is making credit dry up.
This is bad news for the large and small businesses that routinely  
depend on
bank credit.  Try getting a car loan, for example.

So while it's quite true that we need to work on the underlying mortgage
mess, e.g., by allowing banks to rework mortgages where it makes overall
sense, even if the owners of some of the slices of them don't like it,  
and
by authorizing bankruptcy judges to modify mortgages on primary  
residences,
that's less urgent than getting the credit markets working again,  
which is
what last week's bailout does.

Incidentally, the press has done a dreadful job of reporting what the  
$700G
bailout actually is.  It's not a gift to Wall St, unless Hank Paulson  
acts
unusually stupidly.  It's basically a big bank to buy up those  
unpriceable
mortgages.  The plan is the Treasury buys a whole lot of mortgage  
paper at a
discount in return for cash, so the banks now know how much money they  
have,
then after it becomes possible to figure out what the mortgages are  
worth,
they sell them, quite possibly at a profit.  The final cost will be  
way, way
less than $700G, and might even be less than zero.  See, for example,  
this
article by the well informed Bill Gross of Pimco:
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/23/AR2008092302
322.html

Regards,
John Levine, johnl () iecc com, Primary Perpetrator of "The Internet for
Dummies", Information Superhighwayman wanna-be, http://www.johnlevine.com 
,
ex- Mayor "More Wiener schnitzel, please", said Tom, revealingly.




-------------------------------------------
Archives: https://www.listbox.com/member/archive/247/=now
RSS Feed: https://www.listbox.com/member/archive/rss/247/
Powered by Listbox: http://www.listbox.com





-------------------------------------------
Archives: https://www.listbox.com/member/archive/247/=now
RSS Feed: https://www.listbox.com/member/archive/rss/247/
Powered by Listbox: http://www.listbox.com






-------------------------------------------
Archives: https://www.listbox.com/member/archive/247/=now
RSS Feed: https://www.listbox.com/member/archive/rss/247/
Powered by Listbox: http://www.listbox.com