2bz

The U.S. Economy After the Bailout

jlounsbury59 wrote: "[T]he way to recovery is through building "things" (rather than financial instruments). These "things" include infrastructure and domestic energy production facilities that can support domestic production of manufactured goods again."

Our infrastructure is in a state of shambles and these projects would most likely not be funded directly by the private sector. Thus, we would be much better served spending the $700,000,000,000 on fixing roads, bridges, etc. even though the return on such investment is even harder to measure than return on financial paper of currently unknown value. Better roads, for example, would contribute to better mileage, less breakdowns, and faster delivery times.

The U.S. Economy After the Bailout

carey_jim wrote: "TARP is yet another request by the executive branch for a rubber stamp approval by Congress."

Have we not learned from the Iraq fiasco?

The U.S. Economy After the Bailout

Gabe Borenstein wrote: The real punishment is being inflicted on Wall Street /financial institutions which will be forced to sell certain assets at the fraction of the face value but are likely to appreciate to the face value -incredible return for the taxpayers.

Hahaha, brilliant! Again "Gabe", you are a source of incredible humor which brightens my day. Wall street being forced to sell their assets at a fraction of face value. That's humor. Hahaha!

Bailout Talks Lose Sight of the Cost Question

I would also like to point out that our discussions revolved only around the whole mortgages not parceled out into different derivatives. It is counterintuitive to assume that the banks can or are willing to in fact sell all of the associated derivatives in a package that could in effect be broken up into whole individual mortgages. My guess is that banks would keep the tranches/derivatives that will likely be worth something and then try to stick the Treasury with toxic waste that is already worthless at a price indicated by models which have no basis in reality. If all the banks use the same pricing model, and there is no reason to assume otherwise, they will all sell around the same price, regardless of how worthless the paper actually is. Since there is really no limit on the amount of this waste that the Treasury is willing to purchase there is no incentive by the banks to rush to dump it for fear that they will be stuck with a hot potato. The only circumstance in which reverse auctions work is when there is a fear that you will be left holding the bag (or not getting the contract, if we think in positive terms not applicable to the scenario at hand).

Bailout Talks Lose Sight of the Cost Question

gramps2 wrote: "Since homeowners aren't making payments, there are no cashflows. Valuing these things at 30-35 cents on the dollar is saying that the other 65-70% default"

Well, gramps, I don't think that the case is as simple. As I have stated before, this is a grossly simplified estimate based on the assumption that the current mortgage rates to the non-defaulting borrowers would be the same to those borrowers today. I agree with tvb that there may well be a spread, however no one has yet shown what those spreads are. Although tvb speculated as to their existence, tvb disclaimed any actual knowledge. Furthermore, 30 year mortgages according to bankrate.com hover today around 6%. So although I agree with you as to the results based on my very general assumptions, I disagree with you as to the valuation methodology which in your case takes my assumptions for granted and in my case is simply an assumption for lack of sufficient data.

jbde wrote: "Thus 'we the people' get the best and lowest price and thus the best upside potential as the Treasury can hold the MBS's to maturity. "

This statement is a falacy. What "we the people" will get is the lowest ask, not the best and lowest price. The best and lowest price would be the fire sale price however irrational that price would be. The banks have already shown an unwillingness to reduce the prices of those assets below certain thresholds. Furthermore, we have no insight to evaluate whether those prices are reasonable, and the lack of interest in the paper at those prices, assuming that "markets are always right", suggest that the prices are not reasonable and thus far from being the best and lowest.

Bailout Talks Lose Sight of the Cost Question

On Sep 26 10:08 PM gramps2 wrote:

> The treasury will not receive 18% or anything even close. If a
> home owner defaults on their loan (something that those of us without
> an MBA seem to have figured out is happening) -- they don't make
> payments...

This is precisely my point. They will not pay the principal and thus the 35% valuation on the CDOs, and they will not pay the interest which brings the CDO coupon back to 6% (which, at least in this voodoo economic case, is equal to the average interest rate on the underlying performing mortgages).

Bailout Talks Lose Sight of the Cost Question

On Sep 26 05:13 PM tvb wrote:

> Having said that, yes my 18% yield comment is simplistic, but you
> get the point: there is a running yield on these bonds that I suspect
> is substantial (maybe not 18%, maybe less, maybe more). 18% would
> be consistent with the yield of many high-yield bonds which currently
> have strong cashflow (after servicing their debt) and solid businesses,
> but are oversold for fear/liquidiy reasons.

I was referring to my calculations as simplistic. I don't think you are looking at this all wrong. There may be an 18% yield on the performing loans, but the CDOs contain both performing and nonperforming loans. What I attempted to convey by making some grossly simplistic assumptions was that the ratio of performing to non-performing loans within the CDOs might just be the same as the ratio between the current "market value" and par. In such case the rate on the CDOs is the same as the rate on the performing mortages, that is 6% and not 18% (i.e. non-performing mortgages are assumed to have 0 value and make 0 interest payments).

Bailout Talks Lose Sight of the Cost Question

BS Detector wrote: "In the short term, the bad assets are moved off the companies, replaced by equity in the new company. The immediate pressure comes off, and the market determines the actual values over time. I might not be describing this quite right, but the idea's a nice twist."

That doesn't alleviate the need for valuing the assets to determine how much equity the banks can put back on their balance sheet. Unless of course, we come up with an imaginary number, say full value (as good as any other estimate), and let the banks put that up in their balance sheets.

Bailout Talks Lose Sight of the Cost Question

pkscottx wrote: "Part of the problem is that nobody knows what they are "worth" but as the saying goes "it's only worth what someone is willing to pay for it" so mark it to market!"

The problem is that there are no willing buyers nor sellers at an agreeable price, so there is no market. A deficit of buyers at a certain ask does not automatically mean that the sellers are wrong about the price. Furthermore, the mark to market is only a rough approximation of the value. If you sell 1 unit at $1000 that doesn't mean that you'll be able to sell 1000 units at that price. However, the mark to market approach implies the opposite.

Bailout Talks Lose Sight of the Cost Question

tvb said: "If these loans were paying 6% per year at par (don't know if that's the case, just estimating), the running annual yield on the investment (at 35 cents on the dollar) is almost 18% per year."

This is flawed reasoning. If the assets are fairly valued at .35 then the assumption is that not all of the assets are performing. Afterall, the reduction in price is not due to a rise in interest rates, but the amount of defaults. In fact, given a fixed reasonable rate of return the price implies that only about 35% of the loans are performing. You still get only 6% of the pie, but now the pie is 65% smaller. (This is a highly simplified back-of-the-napkin calculation only, to show the fallacy of the argument above) Furthermore, if the bailout actually occurs, the 6% rate may not be enough to offset the rampant inflation that will ensue.