Not sure if you’re familiar with Fooled By Randomness, it’s a fascinating book by Nassim Taleb – published in the early 00’s. He skewers the so-called Wall Street “experts” and their false confidence in unknowable risk assessment. It really is the underlying issure with the current situation. These guys weren’t any greedier or more incompetent than normal. They just happened to be falsely betting their businesses on ridiculous risk management that was the prevailing conventional wisdom.

actually be $700 billion, i agree. It’ll be much more.

Credit default swaps described by Reuters.

They are derivatives designed to protect banks and other lending institutions from large default rates. However, some of them were making contracts without having the cash available should a call be made on the contract.

In one notorious case, a small hedge fund agreed to insure UBS AG (UBSN.VX: Quote, Profile, Research, Stock Buzz), the Swiss banking giant, from losses related to defaults on $1.3 billion of subprime mortgages for an annual premium of about $2 million.

The trouble was, the hedge fund set up a subsidiary to stand behind the guarantee — and capitalized it with just $4.6 million. As long as the loans performed, the fund made a killing, raking in an annualized return of nearly 44 percent.

But in the summer of 2007, as home owners began to default, things got ugly. UBS demanded the hedge fund put up additional collateral. The fund balked. UBS sued.

Not anything like a money market, but it seems to have played a role. It seems this sort of thing could be one reason the Fed has made some emergency cash loans.

any business “too big to fail” either needs to be cut down to size via anti-trust regulation, regulated, or nationalized. The silliness of deregulating an industry, only to have to bail it out, is just absurd.

Any industry where the Executives can give themselves Billions in bonuses, and need Trillion dollar government bailouts have something inherently wrong with them. If the Government takes the downside, they need to participate in the upside.

but this TNR blurb talks about a couple of places where media is backlashing against Palin.

http://blogs.tnr.com/tnr/blogs/the_plank/archive/2008/09/23/even-cnn-is-getting-snarky.aspx

Amusing at the very least. But if you use it, drink a Dr Pepper for me instead…

and not to the morons who signed mortgages they couldn’t afford (and if anyone of you guys reading this did that, then, yes, I’m talking about you).

I moved to Cali 6 years ago, and everyone and their dog told me to buy something, even though I was making $37K/year. “You don’t need a down payment – you can finance with 0% equity!” “Don’t worry about it going down, real estate always goes up!” “There is no more land, only more buyers!” “You can get away with paying only interest for the first 5 years!” Blah, blah, blah. I looked at a market that was obviously overpriced, and looked at my obviously too small income, and said “Hell No.” Everyone thought I was stupid. And for a few years there, I actually began to worry. But I was right – it was a bubble.

It is completely ridiculous, unfair, communistic, and every other word I can’t say for the government to bail out individuals who went against basic home finance logic and reason and bought something they couldn’t afford. Bail them out with MY TAX MONEY!!! No way.

Not to mention that if the government gives a $10,000 check to everyone today, they’ll need to tax that back from us tomorrow. That doesn’t work.

This page is located on the U.S. Department of Housing and Urban Development’s Homes and Communities Web site at http://www.hud.gov/news/recoveryactfaq.cfm.

Housing and Economic Recovery Act of 2008 FAQ



Q: How will the law help struggling homeowners keep their homes?
A: Through the Federal Housing Administration (FHA), an estimated 400,000 borrowers in danger of losing their homes will be able to refinance into more affordable government-insured mortgages. The program offers government insurance to lenders who voluntarily reduce mortgages for at-risk homeowners to at least 90% of the property’s current value.

Q: When will the program begin?
A: The program will begin on October 1, 2008 and sunset on September 30, 2011. Homeowners in danger of losing their homes before October 1, however, should not wait to contact their loan servicers and should begin applying for federally insured mortgages now.

Q: Who is eligible?
A: To be eligible to participate in this program, a borrower must:
Have a loan on an owner-occupied principal residence. Investors, speculators, or borrowers who own second homes cannot participate in this program.
Have a monthly mortgage payment greater than at least 31 percent of the borrower’s total monthly income, as of March 1, 2008.
Certify that he or she has not intentionally defaulted on an existing mortgage, and did not obtain the existing loan fraudulently.
Not have been convicted of fraud.


Q: How can a homeowner access this new program?
A: Homeowners or a servicer of an existing eligible loan need to contact an FHA-approved lender. The FHA-approved lender will determine the size of a loan that a borrower can reasonably repay and that meets the requirements of the program. If the current lender or mortgage holder agrees to write-down the amount of the existing mortgage and make the new loan affordable, the FHA lender will pay off the discounted existing mortgage. Loans provided under this program must be 30-year fixed rate loans.


Q: How does this law help neighborhoods that have been hit by the foreclosure crisis?
A: The impact of the current crisis has not been isolated to individual borrowers or investors, but has been felt broadly by neighbors, communities, and governments across the nation. The law strengthens neighborhoods hit hardest by the foreclosure crisis by providing $3.9 billion in Community Development Block Grants to states and localities to buy foreclosed homes standing empty, rehabilitate foreclosed properties, and stabilize the housing market.
 
Content updated August 5, 2008

I’m more of a bottom up guy than a top down guy, and such a plan has intrinsic appeal to me. The problem is that it would be difficult to implement, and what do you do about all the liabilities that have already been foreclosed upon?

Plus, this may have started with mortgages, but it’s now gone far beyond just that. Maybe shoring up some of these loans would provide a needed injection of capital into the market, but it doesn’t really fix anything. Plus, if that guy down the street is gonna get a bunch of money, where’s mine? You’ll have a lot of that.

The whole thing is just fucked up. Every solution has big problems attached to it. I don’t think we do nothing, though, because capitalism needs liquidity to function. Whatever is done, I hope it’s thought through very thoroughly and if it doesn’t work then we are smart enough to pull the plug and change directions.

If the dollar wasn’t already so weak I could stomach something like this a little better. The $700B wouldn’t be spent all at once. But when you’re starting with a weak currency this approach has trouble written all over it. The effects could be just as bad as doing nothing about the problem.

Thankfully it has not become political just yet. I’m sure it will at some point but I’ve been pleasantly surprised so far. Lots of thoughtful, reasonable responses.

I feel like the more I read the less I understand.

I don’t fully buy the “we were told we had to make these loans!” arguments – because many of the banks that are failing are not the ones who wrote the mortgages, but big investment banks that failed to properly assess the cost to the risk associated when they invested in big bundles of the loans. Maybe the banks didn’t want to write sub-prime loans, but they did, charged more money for them to offset that risk, and soon realized that they could make a lot of money off of them.

Now, I’d argue that banks were more eager to venture into these dangerous waters because there was an implicit government backing to many of those loans.

From an email I sent to a friend last week:

24 month term-


The interest rate is set at three month LIBOR plus 850 basis points. Three month LIBOR is a variable rate that resets weekly. The current weekly rate is 2.81, so the current interest rate on this loan is 11.31 — pretty hefty. Just keep in mind that annual (simple) interest of 11.31% on $1 billion is $113.1 million. On $10 billion it is $1.131 billion. And on $85 billion it is $9.61 billion.

The government is better able to assume risk than even the largest banks – because they can print money they can hold these loans without much concern.

It really comes down to what the value of those bad mortgages are. I suspect that their true value is well over the rate the government would buy them at – think about it – for a mortgage bundle to only be worth 60% of its face value implies that 40% of mortgages will be lost due to forclosure… Which is odd, considering that even in a forclosure, the bank is still left with the property. Even if all mortgages went bad, I’d still say the properties associated with them are worth 60% of that value (note: this is entering areas I don’t understand too well).

You’re right, when you look at it from the perspective of “this is a good way for the federal government to chew down some of that debt”. I just don’t know how I feel about the fed making that type of investment…

My worry is something I read elsewhere – these companies aren’t going to sell the fed loans for under market value – because in that case they’d sell to the market. So the gov’t would have to over-pay. Which bothers me…

are still based on mythical models created by math geeks who assumed they could predict future market activity within a few standard deviations based on prior market results. this new RTC is a desperate attempt to consolidate derivatives in one location to eliminate counter party risk and bankrupting countless entities. To me, the thought that they can buy theirselves out of this with $700 billion is a joke.

from the companies, they would be taking equity from the shareholders.

you should know that by now…