[quote=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. 

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.

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?  

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 .

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.

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.

Wow Stok. 

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…

Here is all you need to know about the bailout:



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

Stok,

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

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

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%.

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.

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

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?

…and they say Nero fiddled as Rome burned.

[quote=snaggletooth]What the f*ck are the Republicans doing wrecking Paulson’s plan?  They are being the biggest bitches in the world right now. 

Rugby,

You want to go with the the House Republican bill?

[quote=Rugby] [quote=snaggletooth]What the f*ck are the Republicans doing wrecking Paulson’s plan?  They are being the biggest bitches in the world right now. 

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.