>Re: Derivatives is like an UFO in Africa! >Posted by: JoeyDVivre (IP Logged) [hide posts from this user] >Date: August 29, 2007 11:46AM >Yep - Brady bonds were big when I first started doing this kind of stuff. Now they are >going away… Maybe they will revisit the program for bailing out subprime mortgage >lenders? Maybe we need to think about doing this again. It seems to me that a different model of gov’t support might be to deal directly with the borrowers who are defaulting on their loans. Suppose that the gov’t funding refinancing facilities for all the defaulters into negative am, 5-year balloon notes. The terms of these notes could be really harsh including payoffs from all future tax refunds, payments from future social security payments, automatic paycheck withholding, Internet registration on the sex offender/mortgage scofflaw list, pension withholding, IRA seizure, exemption from bankruptcy procedures, IRS liens, etc… Make it harsh enough that nobody would default for financial gain. The refinancing would not cost borrowers and there would be no reappraisal, credit checks, etc… The securities which hold the mortgages remain intact and the refinancing is a substitution that does not involve a payment to the mortgage pool (too bad they don’t like that, but they are getting better collateral). The hope is that the MBS now have lots of mortgages that have 5-yrs worth of gov’t guarantee. That improves the cash flow and may improve the marketability of the securities (some stuff to be worked out here). That buys us 5 yrs to fix the economic problem so people can refinance into private mortgages and get off that Internet list. Wall St bears tons of pain on this because they can’t just wash their hands of this stuff. Oodles of middle America buys 5 years to turn their lives around. This takes some time to implement so we will need to adjust credit facilities so that banks can hold on until it is implemented. Whaddya think?
I’ve been thinking about this over the last few days and came to a similar conclusion. If the problem is caused by securitized assets with crappy underlying mortgages AND the source of inaction in Washington is political anger about [the appearance of (with some justification)] bailing out a bunch of rich folks while ordinary americans lose their houses, then maybe the solution is to shore up the mortgages, which should contain the fear about securitized assets and send money to the middle classes, not the folks that have been making millions over the past few years. IMO, these bills fail primarily because they are perceived as “socialism for the rich,” and secondly because it feels like an unwise handover of power to the executive without accountability. Now just as it’s true that maybe those well paid executives didn’t deserve all that much money after all, it’s also true that maybe all those middle class people don’t deserve those nice big homes they’ve been spending their retirement on, but this will at least address the political logjam caused by the feeling that we’re handing tons of money to a bunch of people who may well have manipulated the system for their own gains (sold us mortgages they knew we can’t afford so that they can make money on origination fees and lending). What we need is some leader or respected analyst or economist to come and tell us what parts of the US banking system need to be intact for ordinary people to prosper. Then we design a plan to save that part. Until we actually distinguish what parts of the system are essential to the ordinary american and what part is expendable because well-paid executives made bad decisions, we’re not getting anywhere we want to go. There is still the problem that the MBSs are difficult to value, and even if the mortgages are more secure, we’re not sure of what discount rates to apply to payments or the probabilities that those payments will come in. However, this might be “contained” by shoring up external mortgages, rather than “eliminated” by putting them on the Treasury’s balance sheet. Also, Ben Stein was talking on Larry King last night about how the mortgage problem is tiny compared to the CDS problem (Paul Krugman did not agree with Stein). I am not sure exactly what he means - presumably something about a bunch of counterparty risk - but it’s probably worth talking about and thinking through the consequences in this crisis (like, is this what’s happening now, or is that shoe going to drop later).
I don’t know how tiny or not the CDS problem is, but we should absolutely start thinking about it. It’s an excellent route for default contagion to travel around the world. I think those comments above are spot on. Also, I think that the current bailout bill simultaneously villainizes Wall St while rescuing them. There is something in that for everyone to hate.
I want Buffet for Bernanke and JoeyD for Paulson… Vote for it!
Hi JDV, That is quite an interesting take. My only concern is that it seems like we will be financing losses from the housing bubble. While there is nothing wrong with that, the question arises whether the target of this scrutiny and payment scheme is accurately pegged at the homeowner who overextended his debt to leverage the home. We can argue all day about them making poor decisions in purchasing assets (homes) that they did not have a firm understanding of the terms(fine-lines in contract). But, does this scenario not sound eerily similar to what happened on wall st. with CMO’s? Yet, law-makers jump to support the failing market, while during the mortgage crisis debates a year ago, there was no sympathy… At some level, all stakeholders at the insurance companies and the lenders who signed off on these instruments also should be brought into the picture. They were able to claim bankruptcy and escape future ramifications. Yet, the home-owners are stuck with long-term payment plans for assets they probably have lost or have no intention of keeping. Just my 2 cents…
No argument from me…
JoeyDVivre Wrote: ------------------------------------------------------- > No argument from me… You already have a quality of beauracrats by choosing not to answer of the question which you don’t like.
I like the “socialism for the rich” comment because in my read through the bailout bill we really saw no attempt to stablize home prices. Salvation was sold as helping main street when in fact the bill actually very clearly helped wall street. Willy
I like the JDV solution of not letting the borrowers off the hook. they are after all the ones who BORROWED the money and signed on the dotted line. bankrupcy (default) needs to have serious teeth, or this system is in very serious trouble (the moral hazard is palpable here). allowing borrowers to blame the companies that lent to them is intolerable, then supporing that position with government sponsorship is reprehensible. one of the biggest issues in our society today is lack of accountablility and responsibility. I must say, I am disappointed in a financial system which allowed (even encouraged) separation between underwriter and risk bearer (massive agency conflict), however, I still thoroughly believe in “caveat emptor” - it is a key basis of free markets. Also let the system “heal” itself. Let the banks that are going to fail, fail (wamu, wachovia, etc). FDIC is a key element to maintian trust in the core banking system, involved to faciliate orderly migration of deposits (wamu to jpm). the developments in the last several weeks have been natural and healthy (leh, wm, wb). Frankly, I think we are getting to a period of stability (no more massive failures in the US). Do we really need this bailout package? To be honest I liked the idea of the treasury using preferreds to inject capital into companies (10%+ interest plus warrants, senior to all other equity holders / maybe even sub debt too). Warren got the structure right. To be clear, only capitalize companies that are deemed critical to the ongoing financial system.
cfaboston28 Wrote: ------------------------------------------------------- > JoeyDVivre Wrote: > -------------------------------------------------- > ----- > > No argument from me… > > > You already have a quality of beauracrats by > choosing not to answer of the question which you > don’t like. I agree with his comments - it’s not a perfect solution and I would be happy to hold some more people to account. If there was a good solution to this problem, we would have found it. None of the debate has been about different people offering different good solutions.
Everyone is hollering that “the credit markets are frozen”. Is this is the most problematic “symptom” of the crisis that needs to be addressed? Will helping defaulting homeowners actually increase the market value of the MBS on balance sheets and so allow banks to start lending money again?
Gecco Wrote: ------------------------------------------------------- > I like the JDV solution of not letting the > borrowers off the hook. they are after all the > ones who BORROWED the money and signed on the > dotted line. bankrupcy (default) needs to have > serious teeth, or this system is in very serious > trouble (the moral hazard is palpable here). > allowing borrowers to blame the companies that > lent to them is intolerable, then supporing that > position with government sponsorship is > reprehensible. one of the biggest issues in our > society today is lack of accountablility and > responsibility. Not to defend these borrowers, however you have to keep in mind that the average american is not as educated as you are about finance. The way that many (not all) of these people were presented with mortgage financing options from some loan officer at XYZ bank (who may have been a half step up in education to the people he/she was offering the loan to) was to skew these loans and present them as affordable. The average person trusts these people and says “just tell me what my monthly payments will be”. At a time when mortgage rates were low, average home prices were increasing, financing options were plentiful and gas prices were somewhat stable, many of these people truly thought they could afford their homes.
swisira Wrote: ------------------------------------------------------- > Everyone is hollering that “the credit markets are > frozen”. Is this is the most problematic “symptom” > of the crisis that needs to be addressed? Maybe. Insolvent banks and insurance companies are pretty inconvenient too. > Will > helping defaulting homeowners actually increase > the market value of the MBS on balance sheets and > so allow banks to start lending money again? Helping defaulting homeowners would probably increase the value of the MBS, but I’m talking about refinancing them and then the gov’t guaranteeing the refi and enforcing payments. Instead of the MBS getting cash flows from a mortgage servicer, it would get cash from the gov’t and then the gov’t could use its extensive “make your life difficult” powers to get paid back. That would surely increase the value of the MBS because at least some interest and principal is guaranteed by the gov’t.
JoeyDVivre Wrote: ------------------------------------------------------- > Instead of the MBS getting cash flows from a > mortgage servicer, it would get cash from the > gov’t and then the gov’t could use its extensive > “make your life difficult” powers to get paid > back. That would surely increase the value of the > MBS because at least some interest and principal > is guaranteed by the gov’t. That’s pretty much what needs to happen. In fact I really think when all is said and done any version of the “bail-out” will eventually morph into this.
Skylar Wrote: ------------------------------------------------------- > Gecco Wrote: > -------------------------------------------------- > ----- > > I like the JDV solution of not letting the > > borrowers off the hook. they are after all the > > ones who BORROWED the money and signed on the > > dotted line. bankrupcy (default) needs to have > > serious teeth, or this system is in very > serious > > trouble (the moral hazard is palpable here). > > allowing borrowers to blame the companies that > > lent to them is intolerable, then supporing > that > > position with government sponsorship is > > reprehensible. one of the biggest issues in > our > > society today is lack of accountablility and > > responsibility. > > Not to defend these borrowers, however you have to > keep in mind that the average american is not as > educated as you are about finance. The way that > many (not all) of these people were presented with > mortgage financing options from some loan officer > at XYZ bank (who may have been a half step up in > education to the people he/she was offering the > loan to) was to skew these loans and present them > as affordable. > I’m okay with punishing people for being stupid and gullible and surely not into picking up the tab when they are swindled. Let’s hold that guy at XYZ accountable, but we provide people with free education through 12th grade. If they can’t read a loan document after 13 years of free education (K-12) that my taxes paid for, why should I pick up the tab for the new truck they bought on their HELOC? > The average person trusts these people and says > “just tell me what my monthly payments will be”. > At a time when mortgage rates were low, average > home prices were increasing, financing options > were plentiful and gas prices were somewhat > stable, many of these people truly thought they > could afford their homes. Back to Mom’s trailer, Bubba.
I have not read the paper - but did the Paulson plan have “teeth” in it? If not, I feel better about the bill not getting passed. Promoting greater moral hazard in the future is worse in my mind than saving face and credit markets in the short term. “Nowhere does history indulge in repetitions so often or so uniformly as in Wall Street. When you read contemporary accounts of booms or panics, the one thing that strikes you most forcibly is how little either stock speculation or stock speculators today differ from yesterday. The game does not change and neither does human nature.” - Edwin Lefèvre, 1923
JoeyDVivre Wrote: ------------------------------------------------------- > Instead of the MBS getting cash flows from a > mortgage servicer, it would get cash from the > gov’t and then the gov’t could use its extensive > “make your life difficult” powers to get paid > back. That would surely increase the value of the > MBS because at least some interest and principal > is guaranteed by the gov’t. I have a friend from back in the day and he mentioned to me over a beer that the mortgage servicer’s have more problems. He claims that in a lot more cases than you think, the servicers have encountered defaults that require repairs in order to put a property up for sale or whatever to generate cash flows. “So and so defaulted and on the way out the door they took the appliances, the copper wires, and painted “Countrywide Sucks” in big red letters across the vinyl siding.” Now the market value of the assets underlying have decreased and they need repairs to even get back to that. negative cash flows.
projectplatnyc Wrote: ------------------------------------------------------- > I have not read the paper - but did the Paulson > plan have “teeth” in it? > The bill had nothing in it that I can think of right now about pushing defaulting borrowers to pay back their loans. The bill was about bailing out banks and only marginally about helping borrowers. > > If not, I feel better about the bill not getting > passed. Promoting greater moral hazard in the > future is worse in my mind than saving face and > credit markets in the short term. > Next thing you know, you will be agreeing with Virgin. > > > > “Nowhere does history indulge in repetitions so > often or so uniformly as in Wall Street. When you > read contemporary accounts of booms or panics, the > one thing that strikes you most forcibly is how > little either stock speculation or stock > speculators today differ from yesterday. The game > does not change and neither does human nature.” > - Edwin Lefèvre, 1923
We should take a poll on how many people think the gov’t will have the balls to evict people who default on their mortgages out of their homes if the bailout goes through. JDV’s plan is a lot less scary than bailing out the banks and then turning around and not collecting any of the cash flows because people don’t feel like there are any consequences to not paying their mortgage. I imagine it would be difficult to get re-elected if you’re evicting your constituents.
JoeyDVivre Wrote: ------------------------------------------------------- > I’m okay with punishing people for being stupid > and gullible and surely not into picking up the > tab when they are swindled. Let’s hold that guy > at XYZ accountable, but we provide people with > free education through 12th grade. If they can’t > read a loan document after 13 years of free > education (K-12) that my taxes paid for, why > should I pick up the tab for the new truck they > bought on their HELOC? > In “normal times,” I’d agree with you, but in this case we are stuck with the choices of: 1) a financial system where no one can borrow, businesses go under, unemployment skyrockets, and there is apparently no productive task that americans can compete globally on. Add to this that civilization is only about 5 meals away from anarchy at any one point in time. 2) bail out the swindlers. 3) bail out the swindled. Faced with these choices (which I realize aren’t the *only* choices available, but they do appear to be the major ones), I choose option #3.