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Edited Date/Time
1/26/2012 10:38pm
First of all, I'm 100% against the bailouts...100% AGAINST them.
But, I've been doing some research into them, and it appears there is an exit strategy.
I posted about it earlier in another thread, but essentially the government is buying "bad" mortgage debt from these wall street firms.
"Bad" mortgage debt, does not necessarily mean loans that have been foreclosed on, are delinquent on their payments, or even that there is any gaurantee that they will foreclose. The reason they are classified as "bad" is because nobody wants to buy them, even though a large percentage of them will stay current until they're paid off.
Anyway, the government is buying these loans at a huge discount...like 60%-70% (For Example: Buying a $100K mortgage, for $30K), in the industry companies that buy these types of loans are buying them on the "scratch and dent" market...it happens all the time.
Now, what is eventually going to happen, since most of these loans will not foreclose, is when the housing market stabelizes and wall street gets back it's appitite for mortgage backed securities (which will happen...once the collateral stops depreciating), the Feds are going to sell these loans back to Wall Street for face value (earning a 60%-70% profit).
It's a great business model...why do you think Buffet just wrote Merrill Lynch a $5Billion check for their "bad" mortgages? he's gonna do the same thing....smart man.
now, I'd like to know how the revenue this bailout could potentiall produce is going to be distributed?
I'm still agianst it...but it's nice to know they aren't just giving away $700Billion...with no exit strategy.
But, I've been doing some research into them, and it appears there is an exit strategy.
I posted about it earlier in another thread, but essentially the government is buying "bad" mortgage debt from these wall street firms.
"Bad" mortgage debt, does not necessarily mean loans that have been foreclosed on, are delinquent on their payments, or even that there is any gaurantee that they will foreclose. The reason they are classified as "bad" is because nobody wants to buy them, even though a large percentage of them will stay current until they're paid off.
Anyway, the government is buying these loans at a huge discount...like 60%-70% (For Example: Buying a $100K mortgage, for $30K), in the industry companies that buy these types of loans are buying them on the "scratch and dent" market...it happens all the time.
Now, what is eventually going to happen, since most of these loans will not foreclose, is when the housing market stabelizes and wall street gets back it's appitite for mortgage backed securities (which will happen...once the collateral stops depreciating), the Feds are going to sell these loans back to Wall Street for face value (earning a 60%-70% profit).
It's a great business model...why do you think Buffet just wrote Merrill Lynch a $5Billion check for their "bad" mortgages? he's gonna do the same thing....smart man.
now, I'd like to know how the revenue this bailout could potentiall produce is going to be distributed?
I'm still agianst it...but it's nice to know they aren't just giving away $700Billion...with no exit strategy.
My personal opinion is this is a bunch of crap. For one thing, the investment banks that are in peril are quickly going out of business and being absorbed into real banks. Second, if credit is an issue, it seems much more direct to push money into real banks by the government specifically to fund loans. But the problem is time - if Paulson and Bernacke are right, there's no way they'll work out those details before Monday, and that seems to be the drop-dead day.
As Paulson described it, we were flushing 700B down the toilet no questions asked...no time for questions or explanations. No time for oversight.
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One problem Titan, is that right now, there is nothing in the bail out that expressly defines exactly what the government will be buying. It's not all "scratch and dent". One of my concerns is.........picking up crap in the form of derivatives.
If it was as simple as picking up the tab for real assest that will eventually recover and return a profit to the taxpayer..........it would have been a done deal already, but it's not that simple.
I believe that there is huge potential in this bail out prolonging and actually worsening a correction.
I believe that those crying the "sky is falling" are predominantly made up of
1. The same folks who created the mess.
2. The same folks who will lose their ass because of it.
3. The same folks who will benefit the most from a bail out.
But everything I've been reading is saying it's buying up these companies "bad" mortgage debt.
http://money.cnn.com/2008/09/25/news/economy/deal_reached/index.htm?pos…
"Earlier in the day, congressional negotiators agreed to a set of principles on revisions to the rescue plan, which calls for the Treasury Department to buy up bad mortgage securities from banks in an effort to get them to lend again.
Now, they are also talking about helping the consumer with certain BK filing resticitions and limitations. So no part of me thinks all $700Billion is set aside for bad mortgage debt, but I do believe a large portion of it is.
The problem is the banks can't lend any more money, because they can't securitize the mortgages they've got (to raise more capital), nobody wants to invest in banks that are writing off billions of dollars and their lines of credit are maxed out (again because they can't clear these "bad" loans off their books). So they can't lend money...the entire economy is clogged with bad mortgage debt. If the government steps in and buys their "bad" loans, even at a discount, it gives them capital, opens up their lines of credit it will essentially be clearing the arteries so money can flow freely from one bank to the next and to the companies that need it to grow.
Has this changed with a new plan?
It's common practice that when a loan is funded, the servicing stays with one bank, and the note goes someplace else. But the name on the title is the bank that holds the servicing.
So the feds will not be buying the servicing of the mortgages (people won't have to make their mortgage payment to the federal government), just the paper...and at a discounted value. (How much discounted I dont' think anyone knows.)
As I understand it what they're buying doesn't give them the ability to restructure any of the debts. It just buys up the paper that gives the bank insurance on the mortgages they have and they retain complete control of the mortgage itself. Basically guaranteeing them the profit and doing nothing about being able to restructure the actual mortgages to help out the home owners if necessary.
Buying up insurance even at a discount rate after a claim has been made is not going to be cheap or offer any real solution. All the experts are saying the CDO's are worthless. They have zero actual value and no assets to back them. Any kind of bail-out should be for something of actual value. Not that crap.
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