downtoearth

Paulson/Bernanke: $700 Billion at 'Hold to Maturity' Pricing

Proven:

Boy, you are not kidding!. Tthe dominoes were already beginning to cascade last week.

But, for those skeptics out there..... let's take the proposed TARP-fix, and an example:

WaMu has $18.241 billion dollars of MBS's on its balance sheet (per of the 8-K filed July 22, Exhibit 99, page WM-4) that's 7.6% of its $239.627 billion loan portfolio (ibid). These MBS's earned $335 million of interest income (1.8%) for the quarter (ibid, page WM-2)

If the Treasury were to purchase these MBS's from WaMu for, say, just 50 cents on the dollar...... that would be $9 billion in cash to WaMu and elimination of the "bad paper" from their balance sheet. They would look better, financially; they might even get an improvement of their Moddy's rating; they might even be inclined to make a loan of some or all of that new $9 billion at current 5.9% (plus or minus) rates (if on the full $9 billion, they'd be making $531 million of interest income at 5.9% compared to the $335 billion they were receiving before this exchange arrangement).

Now, for Treasury's perspective: Treasury owns a $9 billion array of MBS's which are paying not 1.8% to the Treasury, but because of the 50% discount, a net rate of 3.6% - that's better than what the Fed is getting on its discount from member banks (2%). Nice.

If one or more of the securities ("securities" here meaning a property which secures a portion of the tranched MBS package) needs to be foreclosed due to severe non-performance, the Treasury will be holding onto a home which, in effect, it purchased for 50 cents on the dollar (more or less, depending on the LTV of the original loan, or how badly negatively amortized, or, on the other hand, and to WaMu's eventual credit...is located in California or Florida where real estate value recovers faster than anywhere else). In any event, there would be a significant if not considerably large value "cushion" which works to the Treasury's benefit when it sells the property at auction. Again, nice.

In effect, what Treasury is doing, is what the banks and the investment banks used to do (before those banks and investment banks got a little "loose" with their lending standards, and then freezed-up because their "let's make a loan" game began to disintegrate before their very eyes). The Treasury will buy and move these securities at "market" prices - and keep the credit "blood" flowing in the economic body.

Paulsen and Bernanke are correct. The risk to the taxpayers is minimal because the Treasury will receive value on the purchases.

The alternative is simply unimaginable.

Mike Hanson - long on this country - and the financially savy Paulsen, Bernanke, and Cox who are answering our 3 a.m. phone call.