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RE: Can someone explain the bail out? - 10/5/2008 3:57:29 AM
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Strider33
Posts: 149
Joined: 4/24/2008
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I don't think we are buying cheap.
The toxic loan packages are not worth nearly what the investment banks paid for them. If they were worth that much, there would be no problem finding other banks to pay for them, and the government wouldn't have to bail anybody out. The loans may not even be worth as much as investment banks are willing to sell them for. The same argument about willing buyers given above applies.
Under normal circumstances, a value for the toxic loans would be determined by the give and take of buyers versus sellers, and the investment banks would simply have to bear the cost of the write downs if they are forced to sell toxic loans as below the cost to them. Some banks might fail if they bought too many toxic loans.
The problem is that too many toxic loans were created during the bubble by mortgage vendors willing to look the other way when borrowers lied about their income, and paid higher prices for homes than the homes were really worth. The foreclosure process doesn't really distinguish between these irresponsible borrowers, and borrowers who borrowed in good faith and got into trouble due to changing circumstances, like the loss of a job.
The second problem is that many of these mortgages were packaged for resale in such a complex way that nobody can figure out what they are really worth. So the marketplace is unwilling to solve the problem of revaluing the packages and allocating the losses. The result is that many banks don't trust each other anymore. The resulting credit freeze up can hurt people who never intended to get into the game of high finances.
The third problem is that many of these loans were adjustable rate, with an intial low fixed rate. The borrowers can't find buyers for the loans, and can't pay the higher rate when the low intial rate runs out.
Enter the bail out: the US is being asked to bear risks, and probable losses, that the private sector is unwilling to bear. The result will be added debt for our children to pay off of or pay interest on. They will pay through taxes without corresponding benefits. This added debt will be reduced in the amount that toxic mortgages end up being paid off, instead of defaulting. But as I said above, many of the toxic loans are going to end in default when the rate jumps up.
Most of these toxic loans never should have been made. Either the lender should have reviewed the loan application more cautiously, or the borrower should not have assumed that they would be able to "flip" the house at a higher price, and should not have accepted the loan.
We are being asked to pay for other people's mistakes. The cost of not paying is, allegedly, even worse than the cost of paying.
_____________________________
Not all those who wander are lost.
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RE: Can someone explain the bail out? - 10/16/2008 9:51:46 PM
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blessedinnyc
Posts: 1958
Joined: 10/12/2007
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I know I came out swinging against buying gold before, but gold prices have come down a bit since the panic has subsided, and given the potential for inflation- which also tends to drive gold prices up, it might be a good time to own a little. However, I think silver looks like an even better deal right now- priced at about $9.50/oz.
I'm thinking about putting maybe 3-5% of my portfolio into silver. It's not that I'm against precious metals- I'm just against buying them when everyone else wants to buy them.
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RE: Can someone explain the bail out? - 10/17/2008 12:39:58 PM
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GroupW
Posts: 2911
Joined: 11/16/2007
From: Up in the hills of Colorado (very BIG hills...)
Status: offline
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quote:
ORIGINAL: Strider33
I don't think we are buying cheap.
The toxic loan packages are not worth nearly what the investment banks paid for them. If they were worth that much, there would be no problem finding other banks to pay for them,
This is exactly the nature of the problem right now - everyone in the industry knows that certain loans and securities have become TOO cheap. There are once-in-a-lifetime investment values out there that people are drooling over and would love to buy.
Why don't they? Simple - noone has the cash. That's the definition of a liquidity crisis.
_____________________________
“For every problem, there is a solution that is simple, elegant and wrong.” -H.L. Mencken
"Most people would rather die than think; in fact, they do so." -Bertrand Russell
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RE: Can someone explain the bail out? - 10/17/2008 10:35:15 PM
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GroupW
Posts: 2911
Joined: 11/16/2007
From: Up in the hills of Colorado (very BIG hills...)
Status: offline
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quote:
ORIGINAL: Strider33
The second problem is that many of these mortgages were packaged for resale in such a complex way that nobody can figure out what they are really worth. So the marketplace is unwilling to solve the problem of revaluing the packages and allocating the losses. The result is that many banks don't trust each other anymore. The resulting credit freeze up can hurt people who never intended to get into the game of high finances.
The third problem is that many of these loans were adjustable rate, with an intial low fixed rate. The borrowers can't find buyers for the loans, and can't pay the higher rate when the low intial rate runs out.
Enter the bail out: the US is being asked to bear risks, and probable losses, that the private sector is unwilling to bear. The result will be added debt for our children to pay off of or pay interest on. They will pay through taxes without corresponding benefits. This added debt will be reduced in the amount that toxic mortgages end up being paid off, instead of defaulting. But as I said above, many of the toxic loans are going to end in default when the rate jumps up.
Most of these toxic loans never should have been made. Either the lender should have reviewed the loan application more cautiously, or the borrower should not have assumed that they would be able to "flip" the house at a higher price, and should not have accepted the loan.
We are being asked to pay for other people's mistakes. The cost of not paying is, allegedly, even worse than the cost of paying.
The last sentence is pretty true. Likely, the cost of not paying is the higher one. Still, it never feels good to pay the price for something someone else did.
As far as figuring out what these are worth, it's not that noone can do it. The problem is that the people who were buying them weren't prepared to analyze them. They are extremely complex, but not impossible to value. I've not only created some of those securities, I've also bought them.
It takes a lot of computing power and some serious mathematicians, but conceptually it's not all that difficult.
Hundreds of firms bought these securities. Only a few dozen actually had the computing firepower to know what they were buying.
As far as likely costs, keep in mind we've been here before. The 1932 Reconstruction Finance Corp engaged in similar strategies and broke roughly even during the great depression. With more astute management and better pricing analytics, there's no reason to think that we can do at least that well this time around.
_____________________________
“For every problem, there is a solution that is simple, elegant and wrong.” -H.L. Mencken
"Most people would rather die than think; in fact, they do so." -Bertrand Russell
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RE: Can someone explain the bail out? - 10/19/2008 10:09:33 PM
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prophet
Posts: 526
Joined: 4/19/2005
Status: offline
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Hi blessed
Appears that theres a disconnect between the price of gold bullion and the price as advertised by comex which is "paper price".
The premiuim is around $80 to $100 above the paper price
_____________________________
Create in me a Clean Heart, O Lord.
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RE: Can someone explain the bail out? - 11/2/2008 8:13:14 AM
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bzirk
Posts: 2949
Joined: 4/11/2005
From: Where the deer and antelope play
Status: offline
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quote:
ORIGINAL: GroupW
quote:
ORIGINAL: Strider33
I don't think we are buying cheap.
The toxic loan packages are not worth nearly what the investment banks paid for them. If they were worth that much, there would be no problem finding other banks to pay for them,
This is exactly the nature of the problem right now - everyone in the industry knows that certain loans and securities have become TOO cheap. There are once-in-a-lifetime investment values out there that people are drooling over and would love to buy.
Why don't they? Simple - noone has the cash. That's the definition of a liquidity crisis.
Oh, there are some who have cash and no debt, and they are buying. Unfortunately, there are not enough of these people to increase to a healthy demand. But if they can buy the assets and hang on, they will make a killing.
What I find so sad is that seeing this situation coming was not that hard. I really get angry when I hear all the financial gurus and politicians who say they had little or no clue we were headed for trouble. They are either stupid or liars. I suspect it's mostly the latter.
_____________________________
may the God of hope fill you with all joy and peace in believing, so you will abound in hope by the power of the Holy Spirit. Romans 15:13
Great quote: I just ain't God and don't know it all. -- SonInMe1
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RE: Can someone explain the bail out? - 11/2/2008 9:18:55 AM
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mrtigger
Posts: 292
Joined: 4/12/2005
Status: offline
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quote:
ORIGINAL: bzirk
What I find so sad is that seeing this situation coming was not that hard. I really get angry when I hear all the financial gurus and politicians who say they had little or no clue we were headed for trouble. They are either stupid or liars. I suspect it's mostly the latter.
Absolutely!! I remember going to lunch with the guys at work in summer of '04 and discussing Phoenix real estate. Even then, the consensus amoung us software types was that real estate was in a bubble and was going to end badly.
Now, if us financially illiterate software engineers could see bad stuff coming way back then, the idea that our financial gurus could not see this coming is just absurd. It's just CYA lies on their part.
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mr tigger
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RE: Can someone explain the bail out? - 11/2/2008 9:41:30 PM
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bzirk
Posts: 2949
Joined: 4/11/2005
From: Where the deer and antelope play
Status: offline
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quote:
ORIGINAL: mrtigger
quote:
ORIGINAL: bzirk
What I find so sad is that seeing this situation coming was not that hard. I really get angry when I hear all the financial gurus and politicians who say they had little or no clue we were headed for trouble. They are either stupid or liars. I suspect it's mostly the latter.
Absolutely!! I remember going to lunch with the guys at work in summer of '04 and discussing Phoenix real estate. Even then, the consensus amoung us software types was that real estate was in a bubble and was going to end badly.
Now, if us financially illiterate software engineers could see bad stuff coming way back then, the idea that our financial gurus could not see this coming is just absurd. It's just CYA lies on their part.
Exactly.
If a middled aged mother of four living in podunk USA can figure it out, it can't be that hard.
_____________________________
may the God of hope fill you with all joy and peace in believing, so you will abound in hope by the power of the Holy Spirit. Romans 15:13
Great quote: I just ain't God and don't know it all. -- SonInMe1
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