UBS: U.S. Bailout for Homeowners Will Arrive by October

A homeowners' bailout by U.S. Congress is a "surefire thing", according to George Magnus, UBS senior economic advisor, and the first bailout package is likely to be implemented by October. Speaking in a video interview with Gillian Tett, global markets editor, Financial Times, Magnus also estimated that the total likely losses from the credit crisis could reach as high as a trillion dollars. The following are excerpts from that interview:

FT: Do you have a back-of-an-envelope calculation as to how big the total hit could be in the credit world?

GM: Well, looking at the losses in subprime and collateralised debt obligations and related instruments, including the spillover into leveraged loans, for example, certainly colleagues and I think that it's something of the order of about $500 or $600 billion, which would make it on a scale of the banking crisis of Japan between 1990 and 1994. But I'm afraid we're still counting, because on top of all of these problems that we've had, of course, the US economy is in or close to being in a recession and the European economy is clearly slowing down very significantly... If you want to take a sort of a round number, something close to $1,000 billion at the end of the day is not an impossible number.

...

FT: So if, indeed, we are facing a potential or possible trillion dollar meltdown, what should the central banks be doing about it?

GM: Well, I think the central banks are, or at least the Federal Reserve, I think, has taken out a very, very extreme form of insurance against this sort of meltdown. And, clearly, the speed and the rapidity with which interest rates have come down is indicative of that, and most people agree that that's not the end of the story that the Federal Reserve will carry on cutting interest rates maybe at least another 100 basis points... But, actually, it's only a part of the solution

...

FT: So, if monetary policy is not going to solve this by itself, what else can governments do? Are we going to basically end up with a situation where taxpayers will be footing the bill for the credit excesses?

GM: I think it's inevitable. Of course, here in the United Kingdom, the saga about Northern Rock, of course, is now, I think, kind of reaching, or has reached, a conclusion, and, clearly, to the extent that we have some form of nationalisation or public intervention, there is a bill for taxpayers. This is pretty small beer, I think, compared with the kind of activities which I think are going to take place in the United States. And I think that a bailout for homeowners in the United States is as close to a surefire thing as I can imagine. The losses on mortgages are so high and the stories and estimates which, perhaps, more significantly, people make about repossessions and delinquencies in the housing market are so high that, especially in a presidential election year, I think it's just inevitable that there will be very strong action from the Congress. The chairman of the Senate banking committee, Senator Christopher Dodd, is already on record as having indicated the way in which he personally would prefer the situation to be dealt with. And I think we have something of a time limit too because, of course, in October the US Congress goes into recess and the new Congress won't reconvene, I suppose, until after the State of the Union message in late January 2009. So by the time they get round to action it might actually be quite late in the day, so I think the first bailout package, to be honest, I think is going to happen between now and the end of October.

See here for the full transcript 25/2/08 of the video interview.

Comments

[Dragon Master:]

If the loss is 1T, it is mainly in hedge funds, leveraged institutions/banking. Why bail them out?

If bailout is the final solution, we need to see these greedy washing out the market first. They created this mess with pockets full and taxpayers shall not pay for them. If they don't die out, they will do again.

2008 Mar 10 10:54 AM

[SoCalsurfbum:]

I guess this just shows how little the capitalists believe in capitalism, and it's ability to self-correct. The only believe in capitalist principles when they are not in the crosshairs...

2008 Mar 10 11:50 AM

[User 162458:]

Before we allow our government to pass some tax-payer supported bailout of housing, which will most likely take the form of tax payer purchase or guarantee of mortgage debt, we should demand that every penny that these financial firms and investment banks paid in payroll bonuses over the past three years be taxed retroactively and placed into a special bailout fund in the first loss position. Let's see how badly these firms really want a bailout if it’s their money that has to help.

2008 Mar 10 02:54 PM

[DCM:]

I am sitting here thinking, I didn't do anything to cause this mess. Yet, my single largest equity position (my home) has dwindled to near zero. To add insult to injury, I have put a lot of money into maintaining and improving my home which is now apparently for the lender's financial benefit. The stock market has tumbled as the result of this financial meltdown (I don’t even own any financial stocks) and the value of my stocks are negative from what I paid. The credit card companies (banks) are taking unusual steps to increase revenues by jacking interest rates and fees whenever possible even on their best customers. This recession or however you want to describe it is taking a huge toll on honest hardworking middle class Americans, not to mention those less fortunate.

In the past 2 years my financial position is in the toilet because of this entire housing/sub-prime/cred... crunch crisis. I am approaching retirement and right now I cannot afford to retire. I did nothing wrong and held up my end of every financial obligation I entered into. Yet, a few extremely wealthy people are getting away Scott free having received billions of dollars in compensation (salary and bonuses) for getting us into this mess. Greed is rampant and unchecked in our capitalistic society. I am all for getting ahead, but not at the expense of my fellow Americans. The monetary policy of this country amounts to trying to put out a raging inferno by pissing on it. Now the taxpayer is going to subsidize all these transgressions by the wealthy; the rich will keep their billions; and, I guarantee you, they will be in position to capitalize on these down markets and get even richer in the years to come. Of course, Congress and whoever’s President will be paid off to protect their wealthy patrons. And, the corporate owned mainstream media will cleverly cast this all so that the wealthy are not implicated by blaming people for taking out mortgages they cannot afford. We are screwed!!

2008 Mar 11 09:35 AM

[sujo:]

"We are screwed!!" You're being too polite.

2008 Mar 11 10:20 AM

[jurp:]

140 billion bails out 2 milllion homes. This includes a 50 Interest free mortagage takeover by the government, and 5 years of a 2% reduction in the mortgage interest rate.

But it does avoid another 2 million houses sold at auction.

2008 Mar 11 10:57 AM

[Fred W:]

This has been in the cards for a couple of years now...the question was when, and how big will the bailout be.
The ostrich mentality couldn't work forever.

2008 Mar 11 11:07 AM

[Expat:]

I know the blogosphere is filled with "I told you so's", but I told you so. A month or so ago i was mocked for saying the government would end up simply buying all mortgages at or near par. I was told this was simply ridiculous.

Now I reading articles in "serious" publications with suggestions like paying mortgage holders the difference between the mortgage and the present value (want to guess where valuations will go if that takes effect?), freezing mortgage payments for x number of years, and, finally, demolishing any home unsold and unoccupied for x period.

As long as we have lost all semblance of rationality, why not simply cancel all mortgages (government pays off all lenders), government buys all new, unsold homes from builders at cost plus ten percent, anyone without a mortgage gets a one-time tax-free payment of $200k, and income tax is eliminated on the first 100k of income.

At this point, who cares? Make our kids pay later, those spoiled ungrateful brats. Kill the USD and make the Arabs and Chinese pay. Free Hummers for everyone. More subsidies for ethanol. Bring back coal-fired trains and factories. Ten weeks vacation.

Costly, you say? Dude, we OWN the frickin' printing presses. We can do whatever we want.

2008 Mar 11 11:53 PM

[WPM:]

I am one of those homeowners who paid monthly only to have the declining market go south with my equity. Old enough to remember how congress bailed out Chrysler for the good of the country. I pay taxes what is so wrong with just once the feds think about the little guy who has his complete savings tied up in his primary residence?

2008 Mar 13 08:28 AM

[Lawrence York:]

The losses are massive because of the leverage and securitization. Can anyone estimate Ginnie Mae's losses that the US Taxpayer owes?

2008 Mar 13 05:29 PM

[User 169278:]

"think about the little guy who has his complete savings tied up in his primary residence?"

having all your savings tied up to your residence is prove of financial incompetence. consider becoming financially literate instead of playing victim. otherwise, move to cuba.

2008 Mar 28 12:21 AM

[kami:]

I'm not keen on my tax dollars going to pay for someone elses house when I dont even own a home. But I'd much rather 140bil go to bailing out my local plumber, contractor, or electrician's home rather than some big fat banker. We're all in this together and unfortunately there are highly skilled people who will be out of work due to the economy shrinking. I worry most for the artisans, carpenters, chefs.. people upon whose backs civilized life is possible. Not to mention all the mothers who will be forced to pick up a part-time or fulltime job now to keep their kids fed. For me, the prospects of marriage and motherhood are pretty much unattainable .. im just a wageslave on the hamster wheel like everyone else.

2008 Oct 04 12:32 PM