The bailout

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Sep 25, 2008 6:26 pm

Let's see....The US government is going to pay $700B for "toxic" mortgage assets that it hopes will be worth more than $700B one day.  Now I'm assuming that these are performing mortgage (loan) assets (then why are they called toxic?).  Or are these assets comprised of real estate properties that have been foreclosed on and now owned by the banks?  If not, and these are mortgage loans that the gov't has purchased, then the politicians have be the biggest morons in the universe.  Noone knows for sure if these mortgage loans will continue paying and therefore will ever be worth near the $700B in wasted tax payer money. 


Can someone explain  this!!!!!!!!!
 
Sep 25, 2008 6:41 pm
lambda:

Let's see....The US government is going to pay $700B for "toxic" mortgage assets that it hopes will be worth more than $700B one day.  Now I'm assuming that these are performing mortgage (loan) assets (then why are they called toxic?).  Or are these assets comprised of real estate properties that have been foreclosed on and now owned by the banks?  If not, and these are mortgage loans that the gov't has purchased, then the politicians have be the biggest morons in the universe.  Noone knows for sure if these mortgage loans will continue paying and therefore will ever be worth near the $700B in wasted tax payer money. 


Can someone explain  this!!!!!!!!!
 
 
The idea is that the majority of people will continue to pay their mortgages on time.  Remember, the Treasury is buying this stuff at a deep discount.  Therefore, not all of them have to be paid back for it still to be profitable.
 
What they need to do in addition to this, is help refinance current loans and freeze adjustments in ARM's if they will be higher.
 
They also need to get the banks to start loaning out money again.
 
Basically, they need to figure out a way to keep people in their homes and get new people into the empty homes.
Sep 25, 2008 6:57 pm

Good point Snag....have they even thought about the next round of shit thats coming down the pipe?  The banks could very likely write off the same amount that they just received from the government.  I counted 12 homes for sale on just two blocks in my neighborhood.  Half those homes have been on the market for over  a year.  I calculate that half of those (3) will go into foreclosure by the end of the year with mortgages probably totaling over $1MM.  I really do hope something drastic is done to help the homeowner, or else we'll face another "economic crisis" next year.

Sep 25, 2008 7:07 pm
Snags is correct.
 
Due to the liquidity squeeze, no one wants to buy these mortgage assets so they are being written down to pennies on the dollar, while the real estate they are secured by may only be down by 20% or so, depending on the market.
 
Govt comes in buying the mortgages on the cheap, houses eventually get sold and the mortgages paid at 80 cents on the dollar when the government bought them for 10 cents on the dollar. So who will benefit?
 
Spare me the end of capitalism, beginning of socialism rhetoric.
 
Stok
Sep 25, 2008 7:58 pm

I have a few clients who are very concerned about the end of "free" markets.  I haven't responded yet, but what are you guys telling clients who are worried about us becoming china?  

Sep 25, 2008 8:19 pm

http://www.financial-planning.com/asset/article/703131/economy-worst-theyve-seen-say-americans.html


 I saw this article on how people older than 60 say this is the worst economy they've ever seen .


Guess if they had the 24 hour news media back during WW 2 they may have a different opinion. Or when the market was down 45% from 1973-74. Or when the US was rationing gasoline and long gas lines in the 70's. Or 16% prime rates and mortgages in the early 80's, with 11% unemployment.
 
How about a 1 day 22% crash in the stock market like in 1987? How about the recession in 90-91? how about the hedge fund Long Term Capital Management's near collapse with over 1.25 trillion in 1998, with global credit markets reeling and the us market fell over 20%, and the consensus was a global market meltdown and certain depression( Sound familiar)?
 
How about the NASDAQ market losing over 75% of its value from March of 2000 to 2003? How about the market losing 45% over the same time period, with the Trade Center towers falling, and thousands of people found themselves suddenly unemployed (or dead)?

By contrast, today our GDP is the highest ever, interest rates are extremely low, unemployment is a hair over 6%, long considered full employment (unless you're in a political season). The people in this interview must all have dementia, where they can't remember what they had for breakfast this morning, much less the events of the past 60 years.


 
That's what I would tell your clients.
 
If that doesn't work, tell them Rosetta Stone has a great course on learning Chinese.
 
 
Stok 
Sep 25, 2008 8:25 pm

Love the answer, Stok.  I've used those same points and started with the ones I know the client I'm speaking with actually experienced personally.  In a polite way, I try to embarass them for having made the "worst ever' statement.....and it usually works.

 
The shortness of the average-American's memory never ceases to amaze me. 
Sep 25, 2008 9:23 pm

Wow Stok. 

Sep 25, 2008 9:35 pm

Awesome insights Stok, you are a Stud  !!!  Another addition that I add to the client conversation is that we have had 34 bear markets since the great depression.  Mr. Client,  how many of those bear markets did we recover from with victory?  Correctomundo.  All of them.  What makes you think we won't recover this time?  So what if it takes another year or two.  Keep up the DCA......

Sep 25, 2008 10:05 pm

Here is all you need to know about the bailout:



http://online.wsj.com/article/SB122230704116773989.html

Sep 25, 2008 10:44 pm

Stok,

I think your message just got forwarded to all our other broker colleagues. :)

Where can I sign up for the client-approved newsletter?

Sep 25, 2008 11:42 pm

Here's a decent explanation of mortgage-back securities:



Let's look at a RMBS. When you are buying a mortgage backed security, there are really only three questions you need to know the answers to:



How many mortgages will default?

How much will I get back on a defaulted loan?

How much credit enhancement is there in the security?

Let's set the table by looking at a few terms and definitions. Using his example, let's take a mortgage where the home was originally appraised for $400,000 and there is a $300,000 mortgage on the home. Let's assume a default and the bank takes back the home. If they sell the home and recover $240,000 that means they lose $60,000. This is called a 20% severity. If they sold and recovered $150,000 it would be said to have a 50% severity.



Next, let's look at how the rating agencies come up with the AAA rating. First they model the expected losses, with emphasis on the word model. If they figure that worst case that 8% of the loans default at a severity of 50%, then the security would lose 4% of its value. To get an AAA rating you have to have at least two times the coverage of the "modeled" loss. In this illustration, that means that 92% of the loans would be put into the AAA tranche. An A rating assumes a coverage of more than 1 times but less than 2. B means you expect to get your money back and if they model that you will get below 100% back then the rating would be at junk levels.



Now, this next fact is important. All ratings assume a par value of 100. The rating of these bonds has nothing to do with price. After the presentation, Rich sat down with me and pulled up an actual mortgage backed security that was being offered that day on his screen. It was once a AAA rated Alt-A security. If I remember correctly it was a 2006 vintage security.



As of the latest reporting, a little over 5% of the mortgages were over 60 days past due or in foreclosure. In this security, there are no toxic option ARMS. The numbers of mortgages in this security that are in trouble are rising. S&P has downgraded that AAA tranche to BBB, which of course means its value is going down.



And sure enough, the offered price of the security is 70 cents on the dollar, or 70% of the original par value. Now remember, this particular AAA bond will only start to lose money after the lower tranches take up the first 8% of losses. Thus, this bond can be said to have an 8% credit enhancement.



Even though the security sold at 70 cents, it still gets all of the first of the proceeds of the home owners who pay their mortgages, up to 92% of the original value in the security. How many loans would have to default in order to make the buyer at 70 cents lose money? Remember, we already had credit enhancement of 8%. But at 70 cents, we just "bought" or priced in another 30%. Let's think Armageddon and that 50% of the mortgages default and they only recover 50% of the loans. That would only be a total loss of 25% to the entire collateral of the deal, but it would mean that the new investor still get all of my 70 cents plus another 13% back! The proud new owner could get up to 92% of the monies paid. Even in a pretty bad scenario, you get more than you paid for the security.



Let's walk through the math. Let's say the original security was $100 million (which would be a very small RMBS). The AAA tranche would have cost $92 billion. If you have it at 70 cents on the dollar you paid approximately $64 billion. In my Armageddon scenario above, the security loses 25% or $250 million. The lower rated tranches are completely wiped out losing $8 billion. Your tranche loses the remaining $17 billion which means you get $75 billion and you only paid $64 billion.

So, how bad would things have to get to lose money on this security? If I am doing the math right, 72% of the loans would have to default with a severity of 50% before your investment of $64 billion was impaired by even so much as 1 dollar. If that happened, it would be Armageddon.



So, why is it rated BBB? Because the rating is over the entire tranche and it is made at a par price of 100. The rating is not affected by the current price. As of today, assuming that even double the number of mortgages currently delinquent default with a 50% severity, your returns over the life of the security would be well over 12%. You would get back $92 million for your $64 billion dollar investment along with interest payments.



The reason this presentation was being made to banks and institutions? Because if you are a bank, you can generally only get prime plus 2% on a loan you make. But if you buy this security with your capital, you can make prime plus 6%.

Sep 25, 2008 11:45 pm

Members of Congress have been saying for three days, that the overwhelming majority of calls from constituents don't favor a Wall Street bailout.



Tomorrow when they read about the biggest bank failure in US history, things will get done.





Sep 26, 2008 12:49 am

What the f*ck are the Republicans doing wrecking Paulson's plan?  They are being the biggest bitches in the world right now. 

 
I see this whole thing blowing up in McCain's face.  If the far right Republicans don't get on board, the economy will be worse, McCain won't show up to the debate, and he will look like a complete jackass. 
 
If Paulson actually got down on one knee in front of all of these assholes, don't they get how serious this is?
 
Sen. Richard Shelby is a complete retard too.
Sep 26, 2008 6:52 am

Agreed. There is an awful lot of posturing going on.



If I understand them, they want to back-stop the defaulted loans (5-6% of the mortgages) rather than buy 100% of them. Only McCain can save the US financial system?

Sep 26, 2008 7:16 am

....and they say Nero fiddled as Rome burned.

Sep 26, 2008 7:49 am
snaggletooth:

What the f*ck are the Republicans doing wrecking Paulson's plan?  They are being the biggest bitches in the world right now. 

 
I see this whole thing blowing up in McCain's face.  If the far right Republicans don't get on board, the economy will be worse, McCain won't show up to the debate, and he will look like a complete jackass. 
 
If Paulson actually got down on one knee in front of all of these assholes, don't they get how serious this is?
 
Sen. Richard Shelby is a complete retard too.



Are you thinking this through clearly?  You want to jump into a Repub. admin. plan 100%?
Haste makes waste...You want to slam a 700Bb bill down the country's throat?  To get to a debate in time?  Expensive debate.   You and the Dems could be considered guilty of panicking...  Take a deep brother!,  Paulson, Bernanke are honorable men, who seem to be doing the best they can.. but why should we (and the pols.) follow them blindly?   Their short tenure and their track record at their current posts is sketchy at best.    Repubs. are playing the Paulson plan the way they should....look at it, change, reject it etc...it in the best interests of the country.  You can throw Bush and his Admin. in with Paulson with the "not worth folowing blindly" camp...

Obama...starting to look like he would largely go ahead with Paulson....(Oops, what? )  Not very Presidential or showing alot of leadership, IMO.

This should be interesting to watch play out...

Sep 26, 2008 10:22 am

Rugby,

You want to go with the the House Republican bill?

Sep 26, 2008 11:35 am
Rugby:
snaggletooth:

What the f*ck are the Republicans doing wrecking Paulson's plan?  They are being the biggest bitches in the world right now. 

 
I see this whole thing blowing up in McCain's face.  If the far right Republicans don't get on board, the economy will be worse, McCain won't show up to the debate, and he will look like a complete jackass. 
 
If Paulson actually got down on one knee in front of all of these assholes, don't they get how serious this is?
 
Sen. Richard Shelby is a complete retard too.



Are you thinking this through clearly?  You want to jump into a Repub. admin. plan 100%?
Haste makes waste...You want to slam a 700Bb bill down the country's throat?  To get to a debate in time?  Expensive debate.   You and the Dems could be considered guilty of panicking...  Take a deep brother!,  Paulson, Bernanke are honorable men, who seem to be doing the best they can.. but why should we (and the pols.) follow them blindly?   Their short tenure and their track record at their current posts is sketchy at best.    Repubs. are playing the Paulson plan the way they should....look at it, change, reject it etc...it in the best interests of the country.  You can throw Bush and his Admin. in with Paulson with the "not worth folowing blindly" camp...

Obama...starting to look like he would largely go ahead with Paulson....(Oops, what? )  Not very Presidential or showing alot of leadership, IMO.

This should be interesting to watch play out...

 
Rugby,
 
I'm not panicking.  I do think, however, some sort of plan needs to be in place soon.  The only thing that has happened since the beginning of this "looking into the abyss" stuff blew up was the short selling ban.

The ban will be lifted on October 1st, unless they continue it.  If nothing else has happened by then, this will all be very painful again.
 
The people who agree with Paulson's plan don't really want this kind of action to take place.  But they see it as necessity.  As far as "slamming a $700 Billion bill down the country's throat", I don't see it that way, in fact, your wording of it is part of the reason the general public doesn't get it.
 
They are buying securities that are illiquid right now.  If they don't come out making a bunch of money on it, they aren't going to lose much.
 
Would this be an expensive debate?  Are you kidding me?  A President should be able to do more than one thing at a time.  There was a presidential election during WWII. 
 
McCain looks like a big chicken, not a leader. 
 
By the Republican's "Looking at it, changing, rejecting it, etc.", we are effing ourselves in our own ass. 
 
Forget bipartisan politics, the Republicans can't even get their shit together.  I'm telling you, McCain brings nothing to this issue.  Neither does Obama.  Neither do the retards in Congress and Senate.
 
They play politics and act like cowards because it will get them re-elected.  In the meantime, the U.S. doesn't look very good in the eyes of the rest of the world.  Remember, it's the rest of the world we sold this shit paper to.  They want their money back. 
 
As I write this, McCain announces he will go to the debate.  See, this is why he just won't look good.  He can't solve this issue, but claims to go back to Washington and figure out a plan.  He is so off the cuff with his comments.  He completely went against what he said he would do.  Some say, "Oh, it's just his maverick style".  Give me a break.  His campaign looks as if they are running around like chickens with their heads cut off.
 
For the record, call it a waste of a vote, but as of now, I'm writing in Michael Bloomberg. 
Sep 26, 2008 11:38 am

Love Bloomberg.  Good move.  He is going to have his hands full in NYC for the rest of his term.  The next president will surely be reaching out to him.