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Tuesday, September 23, 2008

A New And Different Sort Of Treasury Auction

Bloomberg reports:
Federal Reserve Chairman Ben S. Bernanke said the Treasury Department should buy illiquid assets at ``hold-to-maturity'' values under its $700 billion rescue plan instead of at discounted ``fire-sale'' prices.
``I believe that under the Treasury program, auctions and other mechanisms could be designed that will give the market good information on what the hold-to-maturity price is for a large class of mortgage-related assets,'' Bernanke said. There are ``substantial benefits'' to buying assets at a cost close to the ``hold-to-maturity'' price, he said.

Analysts said Bernanke is essentially advocating that government use a pricing model that assumes that the debt will be paid in full over a long period of time.
But a lot of this paper is junk. I can see buying GSE bonds at holding values, but the problem with the rest of it is that the underlying loans are defaulting, and a lot of the bondholders ain't gonna get paid. I agree with the analysts, because the fire-sale price is the new hold-to-maturity price. I just don't agree with Bernanke.

How does one design an auction to render the "hold-to-maturity value"? Put in shills? Let people bid for it, and then go above the highest bidder?

This is why I advocate just advancing working capital and taking options convertible into stock in 5 to 10 years. Don't bother with this crap of buying debt. It's not illiquid. It's bad paper. And if the bank or company really isn't viable, then don't even bother fooling around with capital injections. Let it die.

You can't prop up the market for this stuff when homeowners are defaulting the way they are - and whatever we're seeing now is likely to trend a bit worse because of the weakening economy.

I guess I'm just going to crawl under the bed, assume the fetal position and suck my thumb for a while to enjoy the feeling of being in more adult company. This is starting to feel like I'm trapped in an SNL skit.

Quite a simple point, isn't it?

On CNBC 18 months ago, just when subprime was becoming a notorious word and RE shills were still being invited on for interview, I saw one "contrarian" analyst say with a bemused look, "But these losses are permanent."

As if that settled the argument! He was dismissed by Maria or Erin or someone with the jokey remark, "You guys go away and argue about it on someone else's time."

That someone is the taxpayer.
Mortgage stats from census and other sources

Number of family owned homes:
~76 million
Number of first mortgages on homes:
~51 Million
Number of mortgage payers @ 30 percent of income for housing costs
~19 million
Number of Mortgage payers @ 50 percent or more of income for housing costs:
~7.5 million
Number of Mortgages late one month or more:
4.7 million
Number of empty homes, new, foreclosed, etc
2.7 million
Number of Homes in US in foreclosure
1.4 million

Incomes are falling and will continue to fall. Every one I know is seeing their income decline or remains stagnant. Demand for “stuff” is falling as well. People’s attitudes are changing from one of figuring that tomorrow will be better to figuring we are in for a long decline. Once the mood becomes the prevailing mood, sales and purchases of all items will drop. Inflation seems to be continuing at a high level. Given that it is hard to see how folks with a large amount of their income devoted to housing will be able to improve their situation.

So, from the above it is very likely that most, if not all of the folks that are paying in excess of 50 percent of their salary out for housing costs are going to lose their homes, 4.7 million of them are likely already behind. With 1.4 million homes in foreclosure, that means we are (at best) 20 percent of the way through the housing crash.

This is truly the worst financial crisis since the 29 crash.
CF - there is no possible help for any of us unless we settle down to torture our Congress Critters into responsibility. We don't have the option to let it all crash, but we can't simply dole out free money to the companies that fostered all this. So we take future equity, which is not a bad deal providing it is somewhat carefully doled out.

My nervous breakdown is proceeding along very nicely. The thought of GS pretending to be a bank is giving me digestive problems of a most unpleasant nature. According to the press, one of their brilliant ideas is to buy IndyMac assets. What they plan to do with them I cannot imagine. Words fail me. Tuck them in little vaults? They aren't a bank, they don't want to buy a place with banking management, they just want to play banker? WTF?
Mr. Sensitive - I recognize the engineering mind, which is poorly suited to generate confidence due to its tendency to remorselessly quantify.

I do, however, have some good news for you. Over 2.5 million have already been foreclosed, and the Census stats are somewhat behind. We probably have 2-4 million foreclosures to go. A lot of the current lates will cure, because they always do. I'd say about 50% of the way through.

You are correct that the >50% DTI people are huge problems. That is why I support the mortgage cramdowns. What else is there to do?

Shtove, I wouldn't mind so much if they were arguing on our time. It's that they are arguing over our dimes that hurts so badly.

If the Congress Critters don't squash this, there is going to be a third party. I smell a voter's revolt.
I love your idea. Here's the problem. There's 72 hours to put something together or it's over. Really.

It's clear now how Hitler came to power.
Mom our congresscritters will do something stupid,not as stupid as the paulson plan...they aren't about to give paulson a purse they have their hands in already.It is too late to avoid a severe recession worldwide.My only hope is that Palin will do as good a job with the federal budget as she did with Wasilla's.
How do we convey to our elected protoplasm in Congress that we are MORE THAN DISPLEASED?

I've just read that STUDENT LOANS, CAR LOANS, CREDIT CARD DEBT, and FOREIGN BANKS have been added to the Paulson bailout bill.


I am so angry I could spit nails.

What kind of torture can we employ long distance, Maxed Out Mama?
CF - the equity for cash plan is by far the easiest thing to implement. It's also the least damaging to the overall health of the economy.

Just make them convertibles with no current accounting, and roll them over in 5 and 10 years. That's when the drawdown on the general fund for Soc.Sec/Medicare really begins.
Tom = I'm waiting for some funster to come out with a remix of "Janie's Got A Gun". I can practically hear the lyrics now.

Palin's got a gun - Paulson's last day's just begun.... What did Big Daddy doo? It's Palin's last IOU.
A.Nonny.Mouse - regarding the foreign banks, the truth is that you have to treat them equally if you are buying debt at above FMV prices. Otherwise, our debt instruments will no longer be saleable.

If you are just infusing equity, then you don't have to. I'm smarter than I look in Blogger.
PS: To torture Congress Critters, you threaten campaigns against their reelection by enraged citizens WHO ARE NOT FOLLOWING McCain Feingold rules. Let them try to prosecute a few million people.

Just let them. That means telling your personal critter that if they vote for a free giveaway, you and your officemates have agreed to write letters to the editor and take out personal ads against your critter, and the SEC can go, er, fly a kite.
And CF - with all due respect for your profound misery, which is genuine and rational, Hitler got in by seizing control of the Prussian government, which gave him control of the Prussian police, which gave him the enabling vote due to the fact that the stubbornest legislators against it were already in camps, and the rest of the would-be dissenters were voting with police standing by their sides.

A shocking number of legislators, and in some cases their family members, disappeared into the camps, along with mouthy newspaper editors and the likes.
Clearly the current situation has no comparison to the human tragedy of WWII. What I was thinking of was the speed at which Congress is prepared to act with a huge decision. I likened that to the takeover of power by the Nazi's after the Reichstag Fire. Amongst the thugs.
Ah, yes, the public hysteria.
Most persons in government seem not to want to let the system collapse, but here we are, 3 days after the “500 trades away from meltdown” and the system is working. If we want to commit up to 1.8 TRILLION to a problem, shouldn’t we know what the problem is? If we don’t let the crises play itself out, how can we know? I think your proposal is more along these lines, but I am dismayed at the casual nature of this commitment. I am reminded of the “Stockholm Syndrome.” http://en.wikipedia.org/wiki/Stockholm_syndrome
We are sympathizing far too much with our captors. They need to be punished (monetarily).
Great blog!
More Government Leads To More Government…
Posted on September 24th, 2008 by MoverMike

MaxedOutMama is steamed today about something Bernanke said, “…the Treasury Department should buy illiquid assets at “hold-to-maturity” values under its $700 billion rescue plan instead of at discounted “fire-sale” prices.

One of the things that has brought down Bear Sterns and Lehman has been mark-to-market accounting, using “fire-sale” prices. It works like this: you and your neighbor each own a $300,000 house. Your neighbor, for whatever reason MUST sell his house, immediately. Maybe he has one of those 0% mortgages that is going to reprice and he cannot afford the higher payment. Anyway, his distress sale of his house goes for $200,000. Your mortgage with your bank is based on an appraised value of $300,000, but the market says it is worth only $200,000. Even though you are current on your 30-year mortgage, your bank wants you to put up an additional $50,000 to bring the mortgage in line with the houses’s new value.

Due to WorldCom and Enron scandals, “where the regulations already in existence, followed properly, should have rung appropriate alarm bells without the need for additional legislation”, Congress meddled and passed Sarbanes-Oxley. SOX was used to hammer corporate execs into truthfulness by making them guarantee their financial data. One way to do that is to use mark-to-market accounting.

Now when we get into big trouble, I contend because of giovernment meddling, we need another dose of big govwernment via this RTC_like agency and now they don’t want to follow their own rules! It stinks if you ask me.
There are two things that have to happen to restore confidence. The illiquidity problem must be solved. The continuing decline in real estate values must be halted.

The theory goes that if the illiquidity problem is solved it will help with real estate prices because there are buyers out there who want to buy at these new, lower prices but they can't get mortgages.

The illiquidity problem can be solved by the Paulson plan or by MOM's plan of simply injecting the money for equity. But, there also has to be some plan for working through the CMOs so they can be valued rationally. There are bad loans out there, but 20 cents on the dollar is pricing in the total collapse of the real estate market. Rational pricing will restore confidence, but that will take time. That's why something needs to be done post haste.

Ultimately it all comes down to restoring confidence and, as long as the banks are unable/unwilling to lend, there will be no confidence.

Funny about confidence. No one believed a piece of plastic could substitute for money when I was a young man. Today, plastic is the money of choice. But only because we and the merchants have confidence that it represents money.

MOM is smarter about these things than the average, so I'm inclined to go with her idea. But whatever plan is enacted, it has to be done soon. IMO time is running out. Tell your Congress Critters that too.
Can someone explain to poor YT why insured securities are being marked to market? I thought they were built and sold like bonds? Why MTM then?

Is there a good link that explains the difference between a MBS, CDO etc? I guess I'm confused about the role Fannie/Freddie played vs. what the IBs played. I get the gist but not the details.

I still say we burn the houses down...anything to force the loan originators to go back and double-check borrowers debt assets and income. Isn't that where the real source of this problem came? Those things being in question?

[pulls out lighter] *flick flick* *flick flick*
It looks like they are slipping student loans and car loans into the bailout plan too. The interesting thing about that is that student loans are one of the things you can't clear in a bankruptcy. There's something truly fishy about that.

As for a report from the real world, it looks like folks are willing to try and hang on to a high speed internet connection, but the folks on dialup are starting to bail. A number of these folks cite computer problems as a reason, making me think that viruses have rendered their computers unuseable. I don't think it looks good for Microsoft in the future. The other interesting thing is that we are seeing a flight from our "scenic" tourist-based area back to the cities. It's not unexpected, given the cost of gas. So far, I'm not seeing a lot of credit issues with customers, just the usual swapping cards. We're not in bad shape, thanks to that unemployment extension.
Looking at this whole mess suddenly makes me very glad that my home is paid for, and that we planted a very large veggie garden this summer.

I'm going to hunker down, keep paying down my credit card debt (mainly inventory for my small business, which generates income), and try to divert what I can into savings.

Here's hoping that Canada isn't as badly as affected.
MoM, if a centrist third party forms, the left fringe of the Democrats and the right fringe of the Republicans will be wondering why their candidates can't get more than 15% of the vote so fast it will make their heads spin.

Mood in the office is quietly angry. On the shop floor, it wouldn't take much to start an angry mob. If the Street thought this would go down like the S&L crisis did, the Street thought wrong.
MoM, what are your thoughts on this evenings speech by President Bush? And, what do you think about McCain putting everything on hold right now?

The Anchoress has a very interesting, urgent update on her site right now. What a mess we are in!
I agree with McCain and Obama getting in on the solution. My thoughts are in the post above.

I thought Bush's speech was bad because it was inaccurate and did not clearly explain why this plan would work.

If the plan is what I am guessing it to be, they need to come out and explain that to the American people, because it is a good plan, a workable plan and a fair plan with pretty broad-based benefits.
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