Bailout Selling Points Don’t Add Up
September 30th, 2008 | by Ken Grandlund |I’ve been hearing it again and again, ever since the Bush Administration came up with it’s financial bailout scheme- if we give the banks and financiers $700 Billion of taxpayer money to buy up the “toxic” debt, down the road, the taxpayers will probably profit in the long run.
HUH?!?
Okay- the banks hold the mortgages. Right now, the banks are on the hook for any of the mortgages that go into default. The numbers I’ve been hearing put the “toxic” mortgage numbers at around 10%. So that means that as of now, about 90% of the mortgages are being paid on time, in full. But in order to cover their exposure on that 10% of bad paper, the banks and financiers took ALL the mortgages, GOOD OR BAD, and bundled them together into trading instruments. So now, the bad loans are comingled with all the good loans into these exotic investments. Each little investment instrument has some good and some bad in it-balancing the portfolio to cover the risk. So far, so good-at least as far as comprehension goes.
Now the government is saying that we need to use up the taxpayer’s money to buy ALL these exotic investment vehicles so the banks can clear their books and get back to business. The government will purchase ALL these investments for pennies on the dollar- say 30 cents or 50 cents. Suddenly, the taxpayer now owns ALL the debt, can absorb the “toxic” loans, and eventually sell the “good” loans at closer to their dollar for dollar value- WHEN THE ECONOMY COMES BACK. This is a NO LOSE deal for the taxpayer in the long term, so the story is going.
But hold up there pardner…if these assets are being sold at fire sale prices, AND if these assets mostly hold good value, WHY AREN’T THE BIG MONEY PLAYERS WITH PLENTY OF CAPITAL RUSHING IN TO GRAB THESE PRODUCTS UP? If the buy-out is such a good deal for taxpayer money, it should be an even better deal for financiers and investors who always grab a cheap deal when they can. Where are these folks? I’ve heard time and again that in the long run, the taxpayers MIGHT EVEN MAKE MONEY on this bailout. If so, every Warren Buffet with a billion dollar portfolio should be chomping at the bit to get a piece of this tasty pie.
Bu they aren’t jumping, are they? And that leads me to believe that something isn’t being pitched to us as accurately as it should be.
For instance…many of the mortgages are for a value higher than the property is now worth. Just because a person is on time and not in default today is no guarantee that they will be able to stay in that position. If I hold a mortgage for $500,000 but my house is now worth only $250,000 all is well so long as I keep paying the monthly bill. My mortgage is one of the “good” ones in the piles on bundled mortgages. But suppose I lose my job- now my mortgage heads over to “toxic” territory and the real value is much lower than it was on paper. That “profit” margin being touted that the taxpayers might recoup is suddenly not worth as much as when the government bought it, and the return on it isn’t going to “profit” the taxpayers much, if any, after all. It could take decades for property values to return to their historic highs (if they ever do…if they ever SHOULD).
Suddenly, the rationale that the taxpayers will benefit down the road don’t seem so sound. It sounds more like something a financier thought up to make a big profit. Oh wait…this scheme’s master planner IS a financier- former Goldman Sachs CEO Hank Paulson. And the profit to be made in this deal isn’t for the taxpayers, but for all the big banks and financial institutions when they unload their bad bets on a public that is still being lied to. They profit by not losing as much as they should.
Some polling shows that when taxpayers are told that this bailout will probably end up being profitable to the taxpayers, people are supporting the deal by a 2-1 margin. (Sorry, I can’t find the link. But this is a number I’ve recently heard in a couple of places.)
Just like a new car loses value the minute it goes off the lot, these mortgages-GOOD OR BAD- are losing value daily-money that won’t return just because the taxpayer picks up the tab. So this fiction that the taxpayer will ultimately profit from a bailout is likely just that- fiction.
Or am I just not seeing this rationale in the proper, creatively colored light that I am supposed to be seeing it?
(cross posted at Common Sense)
4 Responses to “Bailout Selling Points Don’t Add Up”
By Jet Netwal on Sep 30, 2008 | Reply
Oh, you’re seeing it alright, Ken. I think I learned at my mother’s knee: If something sounds too good to be true, it ususallly is.
By Paul Watson on Sep 30, 2008 | Reply
Ken,
Allow me to offer a possibility as to how it isn’t profitable for Warren Buffet et al but is for the government.
If Warren Buffet buys $100 million dollars worth, he has no idea how much of that is good debt and how much bad debt. And how much of the good debt is precarious, or overvalued relative to the property it’s secured against. He might be getting a bargain, but he could also be stuck with total dross. The risk is completely unknowable and that isn’t worth the price currently on the market. Also, i he needed to borrow the money, well, that isn’t likely at the moment.
In contrast, the government, by buying the whole debt book (which no one else could afford) knows exactly what it’s getting. The risk is known. The government can also unpick the securitised loans back to the original mortgages which can then be sold on directly.
That’s how the government can make a profit but a private company can’t. Doesn’t mean they will, that it’s a good idea, or that it isn’t too good to be true, but there is a way it can work.
By Ken Grandlund on Sep 30, 2008 | Reply
I get that possibility Paul, but it still isn’t adding up.
If the government can unwind these securities, then so can the institutions who bundled them in the first place. Make these folks figure out what is bundled where-glean out the bad debt and take the loss. Take the remainder and determine which loans still hold a close to market value and which are likely to lose money. Take those most likely to lose value and renegotiate them so the paper worth more closely represents the actual worth. This gives the lenders a more true financial picture and offers homeowners a better loan at a more realistic value. The difference can be written off as a loss too, and maybe even give a tax credit to the lenders for their losses.
The best loans could still be bundled and sold if that isi how they want to play it.
In any case, the deal offers both Main and Wall Street with some relief, while keeping the punishment on the lenders who made the bad deals to begin with.
I’m no economist or financial genius, but I’m not buying that these mortgages will eventually make money for the taxpayers unless they are bought for more like 10 cents on the dollar. The home values just aren’t there compared to the loans taken out…and I don’t see them rebounding to the inflated prices any time soon-who could afford to buy them?
By Paul Watson on Sep 30, 2008 | Reply
Ken,
The problem with unwinding is that they’ve been bundled together so any times that no one, quite possibly including the people who bundled them, has a clue what’s what anymore. If the government has bought everything then it can be unbundled easily because you simply say “I’ve got everything, therefore we’ll unbundle it because I know what I’ve got: everything”.
I would also be somewhat skeptical about these things making money, but it’s possible the government can manage it when the banks and financiers can’t.