not a fan of generalizations. most rebublicans i know, including myself, don't like corporate welfare, we want less government.
when i first read about the bailout i was pissed. my first reaction is let wallstreet fall. see what happens and pick up the pieces. but, i wanted to know more so i asked a friend of mine who knows alot more about this, "what would happen if the government didn't step in?" he posted the following on another board i frequent. it's a good read, and very informative.
This is a really difficuly question you are asking, and no one really knows what the fall out would be at least in $ amts. It WOULD be bad however.
I am no global economist, but I do have a background in some of this stuff.
Here is a few things that I think most Americans do not understand when looking at this issue.
Lending in this country is never done over the "long term". No mortgage company takes all of their money, lends it out to people and then sits back and waits to collect the monthly payments. A portion of their portfolios are made of of this but MOST is meant to be liquid and easily transferable. It is a commodity similar to say a bond issued by At&T or GM etc.
So, a bank does not have access to unlimited capital to lend. What basically happens is that they lend you, lets say, $200,000 at 6% interest. Now being that said loan is worth something (a 6% return on investment annually for life of the note..in this case 30 years) it is marketable. Now what happens is another firm or investor is willing to pay for said item. So a bank can lend the money, hold the paper for a short term (say 3-4 months) and then sell it to said investor for lets say $210,000. This is a win for the bank since they have made 10k real quick, transfered their risk, and reclaimed the initial capital (the 200k) to reinvest..or to better state it..re-loan. It is a win for the investor (assuming the note does not default) since they bought a security for 210k that if they hold to maturity will pay them over $400,000. So this 'sale of assets" happens many times throughout the "life" of the note. Now the main thing to remember is no one is looking to hold a majority of their portfolio in long term illiquid assets. So look at it this way, PNC Bank does a mortgage for you...PNC then sells said mortgage to Lehman. Lehman moves cash investments from borrowers to pensions or retirement plans by having the pension plan "buy" the mortgage. So you are left with an MBS (mortgage backed security) now supporting a portion your retirement, same as say a stock or bond. This is fine as well and is (was) common practice.
Now the main thing to remember here is that interest rates are based ONE thing only. RISK. There are many things that attribute to risk (credit income etc etc) but the bottom line is someone is taking on a level of risk and expects a return for that risk. Mortgages are not bought and sold individually but in bulk, based on credit risk. So your $200,000 mortgage in this example is actually bulked in with other borrowers loans of the same type and level of risk and then sold in a "block" of lets say 10 million a piece. Now the thing that most people miss in this equation is that the main risk factor that influences pricing on home loans is NOT credit but how much you are borrowing in relation to the value of the home.
So lets say that $200,000 was lent on a $250,000 house (80%), and was priced at 6%. Now that pricing also takes into consideration an expected increase in that home's value of the course of time (usually about 4%-5% per year). Now prices are not rising but FALLING. Now said mortgage is a $200,000 note that is securitized by a house that has decreased in value to $220,000. The "pricing" on the note is no longer valid, since the collaterial for the loan is worth less, and therefore the loan presents a higher risk. But this is now systematic of the entire BLOCK of loans, all 10mil worth (in this example). these loans are not worth money now. They would have to be sold below par, meaning LESS than face value. But how do you know what to pay for them. Housing keeps decreasing, the 'risk" on that block keeps gettig higher (from both decreasing values AND an increase in rate of default), but the rate of return stays the same. So investors (or BUYERS) hedge on these purchases, or just stay away. These securities become non-liquid. Sale on them becomes stagnant and, if you can sell them, it is at a deep loss.
So the problem comes in that these banks cannot "turn these over". They are stuck with them. Now again they do not have an unlimited supply of funds. Their ability for future lending relies on the fact that they can transfer and recoup the funds they just lent. If they can't do this they have no more money to lend. From an investor standpoint, like a Lehman, they now have "bad" assets on their books that they again cannot sell. If they are weighted to heavily in these, they now have a major liquidity problem. Market investors see this and sell off stock, or refuse to buy, since they are aware that some of these "balance sheet assets" should really be classified as "liabilities".
Wells Fargo is a prime example of this ****. If you look at their 2nd quarter earnings when they were released it looked great. Stock went up right after the announcement etc etc. But when you break the numbers down all they did was creative accounting. They "re-classified" a bad mortgage from one being 90+ days deliquent to one being 180+(or it might have been 120+) days deliquent. This allowed for billions of dollars in bad loans to still be classified as an asset. Not to mention the 80+ billion dollars in HELOC's that they hold currently that they are classifing at (basically) face value, but yet would not be able to sell for any more than 7 cents on the dollar.
This is toxic paper, and it is basically worthless in the market as it stands today. So the Govt plan is to buy this paper, allowing these guys to get it off their books, which in turn will allow for increased confidence in the market, reinvestment into these firms (ie people will buy stock again), and immediate capital (from selling this paper) which will allow for them to start lending again at a bigger clip.
I have not made my mind up on this plan yet since I need to see the particualrs. If this is done right, the tax payer may not have to foot the bulk of the bill on this. The govt may be able to gather the money needed by issuing new debt (treasury bills) acquire the "bad" loans. If the market corrects itself these "bad" loans will become marketable again, and can be sold off to retire the debt that was incured. If it is done wrong, the govt is going to be stuck holding a ton of paper that is worth nothing, and eventually wind up in the real estate market cause they are going to own a lot of foreclosed homes.
Here are the things to look out for in the plan when it is proposed:
1. What is the govt. paying for the debt they are acquiring, or better put what is the face value of the debt. So if they spend 100 billion on this debt, and it's face value is lets say 800 billion this might not be that bad, since they have a lot of breathing room. If it is 100 billion to buy 150 billion at face than this is nothing but a fre pass for these companies.
2. How does the govt plan to fund the initial purchase of this debt.
3. What classifies as a "bad debt" to be purchased. This was a major problem with Fannie. Fannie claims to only have 750 billion in sup prime loans verses a 6 trillion dollar pool of paper. Trust me this is ******** (see wells fargo example--except 10 times as bad). We need to make sure that we are getting the bad debt out of the market, not just a small portion of it.
4. what are the long term plans for offloading the debt
5. What benefits will the homeowner get directly from this bill. If the govt is going to allow for these homeowners to modify their payments, or streamline over into, say an FHA loan, with very little probelms, then there may be a benefit. If it is going to have provisions like that housing bill from a few months ago, where there were SO MANY requirements to meet to get the help needed that honestly only about 1 in 15 homeowners would benefit from it, than it is useless on this level. All the govt will be doing at that point is acquiring foreclosed property and selling it a huge discount, which will only push values down further. First rule of thumb in mortgage lending..we don't want your house, we want your money.
6. What provisions are going into place to insure this does not happen again.
These are very simplified examples of what the problems are. There is a lot more to it, and i don't understand all of it either, but hopefully this gives you an idea of why they are looking at this plan.
