Baseball Crank
Covering the Front and Back Pages of the Newspaper
September 24, 2008
BUSINESS/POLITICS: How We Got Here

Daffyd ab Hugh at Big Lizards has an insanely long but comprehensive and comprehensible post on the nature of the current financial crisis and the Paulson bailout plan. (H/T Ace) As somebody who was familiar with a good deal of this stuff before it hit the front pages, I can vouch for the fact that this is a smart, clear, insightful summary. My main question about it is that Daffyd seems to assume that Treasury will be buying MBS at the low, distressed market prices now available, and I'm not sure we have assurances that is the case.

By the way, I was listening to the horrible Mets game rather than watching President Bush's speech tonight, but on paper at least the speech was a fairly clear layman's explanation of how the crisis developed. I know some conservatives wanted a more partisan finger-pointing speech, but Bush isn't running for office, he's trying to hold together fragile bipartisan support for a bill nobody likes. And he does seem to give credence to Daffyd's reading of how the bailout will operate:

[A]s markets have lost confidence in mortgage-backed securities, their prices have dropped sharply. Yet the value of many of these assets will likely be higher than their current price, because the vast majority of Americans will ultimately pay off their mortgages. The government is the one institution with the patience and resources to buy these assets at their current low prices and hold them until markets return to normal. And when that happens, money will flow back to the Treasury as these assets are sold. And we expect that much, if not all, of the tax dollars we invest will be paid back.
Posted by Baseball Crank at 11:45 PM | Business • | Politics 2008 | Comments (7) | TrackBack (0)
Comments

Crank, I have missed something in this mess and I hope you can explain it. These sub-prime loans all have mortgage insurance, so why are we having a lender crisis and not an insurance crisis?

Posted by: maddirishman at September 25, 2008 7:58 AM

I hate the idea of the bailout. I really do. However, the more I look at it, the more I realize it has to be done. And it must be done as a long term loan, even a no-interest one, with a higher return of principle. We are asking that We the People pay close to One Trillion Dollars to prop up businesses that couldn't keep themselves afloat. However, it may be the only way to make sure that many other businesses can keep themselves afloat. Or the entire economic engine built on credit (which is really just a belief that it is all good) crashes. Lots of people don't like it, and that's where politics comes in.

I think that with any bank, insurance company, or whatever, if they are bailed out with public money, the senior management must be terminated. We could finish last with or without them. And no bonuses. Government employees do not, to my knowledge get them. That way, companies like JPMorgan Chase, Bank of America and the like, who were not nearly as stupid and greedy, can do what they want with pay. It's their business, not ours.

The money, as it comes back over the years, has to flow back to the general treasury, and must be allocated only AFTER it comes back. None of this future tobacco money bull.

Irish, my guess is that most of the insurance on the mortgages is title insurance, which rarely comes into play. I assume most of the properties has good title.

Posted by: Daryl Rosenblatt at September 25, 2008 10:36 AM

I was watching the baseball games as well, so I didn't see Bush's speech. I read through it this morning, and I will be very interested to see how the left reacts. It seemed to be a "trust me, we need this" speech, since most people really don't understand the details of the crisis or the bailout. I can't imagine going over well with leftists and others who think that Bush lied us into the Iraq War. I suspect members of Congress are getting a lot of angry phone calls and e-mails this morning urging them not to trust Bush again.

Posted by: wd at September 25, 2008 10:48 AM

Great link Crank, just one small fact left off by that homer. The current President on multiple times encouraged the public to refinance their homes to help the economy. But why should fact get in the way.

Posted by: javaman at September 25, 2008 12:51 PM

FTL: "buy these assets at their current low prices and hold them until markets return to normal. And when that happens, money will flow back to the Treasury as these assets are sold. And we expect that much, if not all, of the tax dollars we invest will be paid back."

Not a bad writeup as long as you can get around the 'Dems are eeevil' parts. Personally, I think they are going to rip apart each CDO/MBS they get, take out what is good, package them together and send them out. Preferably using the vast CDS market to get insurance on the new one. And it doesn't sound like they're going to reinvest the money the manage to get back.
Personally, I've grown very tired of both the arguments that this is money that is completely lost, or a good chance the government will profit, especially avoid that whole question of interest. I don't care, it doesn't matter, and is not the point, or address the risks of what can happen until the final calculations are done.

Think about the reasoning behind this - it's to get markets moving again. If the government buys 2 sets of CDO/MBS for $20mil, rips them apart and puts together 1 good and 1 very very bad one... If the auction price for the good one is $15mil and the bad one $1mil.. Do they sit on it or push it out(and yes, I know the process will be different, and now includes equity)? And, if you can find a buyer at $1m, why sit on it for 5 yr to possibly sell it at $10m?

Then again, I think they're also going to be veering off into supporting via CDS markets more than anyone has talked about. And I can't shake the feeling something else as well.

We should make lists on the worst 5 interventions of the past couple of weeks! Not that these were unnecessary, but annoying.
1) The Detroit interest free loan ($25B! another next year!)
2) The Money Market panic insurance
3) The inclusion of foreign corporations + non-housing (auto+CC) in the bailout
4) The financial only Short ban
5) The $700B itself

Lists are fun... and depressing.

Posted by: Dave at September 25, 2008 6:05 PM

Daryl,
When a martgage does not have at least a 20% downpayment the person is required to also buy mortgage insurance. This is to guard against default and is a requirement. Therefore, if all of these sub-prime loans have mortage insurance why is there a mortgage crisis? If it were an insurance crisis I would understand.

Posted by: maddirishman at September 26, 2008 8:18 AM

"Daryl,
When a martgage does not have at least a 20% downpayment the person is required to also buy mortgage insurance. This is to guard against default and is a requirement. Therefore, if all of these sub-prime loans have mortage insurance why is there a mortgage crisis? If it were an insurance crisis I would understand."

Actually, they aren't. It's one of those common misconceptions, but they want you to buy it so it gets sold off easier, and to protect them. Conforming loans and all that.

Not many people would insure Subprime, since they historically foreclose at about 5% instead of the Prime And if you got an 80/20 or 80/10/10 or 80/15/5, you could skip out on MI as well.

And, that 20% equity could come in a raise in home values relative to debt, not waiting 5-10 years to pay it off. So, a $200k house that you put $20k down on that could be re-appraised at $250k (due to bubble) would mean that you would only be at ~$175/$250k, less than 80% debt, and be able to walk away from MI.

I think 4 years ago(last time I worked for a bank's very happy mortgage division) PMI was for 10-20% of mortgages, and the MI companies lost marketshare in 2004-2006, relative to previous year let alone total volume.

The biggest MI hits happened last year, it was just overshadowed - though without a doubt it is continuing this year, and the MI companies have stayed downgraded. And of course, the insurers were ok saying "fradulent loan! MI invalid!"

But most importantly - default is happening outside of that 10-20% that is historically gets PMI.

Posted by: Dave at September 26, 2008 9:01 PM
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