Financial bailout bill does not pass

[fractalgal]

Last night, one of the incumbent Democrats was on CNN (?) and said that they (Dems) had to bring 120 votes (I think) and the Rep. had to bring xx number. Dh and I realized that those numbers (at least for his party) were the members who are in "safe" seats for the upcoming elections. They can vote on the bailout and not worry about a backlash during the reelection if their constituents don't agree with it.

 

So, they don't want to involve anyone in a risky district in the bailout vote. So much for putting the country and our kids' future first.:glare:

 

I don't think the American people will forget this decision any time soon. I doubt these people will be "safe" in several years.

 

I found this interesting article:

 

http://www.cnn.com/2008/POLITICS/10/01/paul.qanda/index.html

 

This man makes sense to me. He also doesn't change his views based on the latest poll.

[Renee in NC]

With time and google, I can find just as many quotes, or more, that say the opposite.

 

Let's take a subprime loan that originated at $90,000. At the time, the house was worth $95,000 and the borrower put down $5,000. Let's assume that the market has reduced the value of the home by 15%, down to about $80,000. Let's also assume that the borrower is not in default (the majoritiy of subprime loans are NOT in default, but they are packaged together with the ones that are, so they are caught up in the same securities market). This is a borrower who wants to stay in the house and is willing to ride it out until home values come back up.

 

Forcing a bank to write down a $90,000 loan that is not delinquent to a value of only $15,00 when, again, it is not delinquent and the collateral for the loan is worth $75-80,000 on the market is plain ridiculous. This is an instance where mark to market accounting exaggerates reality. Saying that that loan is should be valued at $15,000 is NOT reality.

 

Even if the borrower was in default, writing the value of the loan below $50-60,000 is not realistic.

 

This is the problem - the subprime securities are worthless on the financial market right now, but that doesn't mean that they are really as worthless as the current securities market treats them (which is panic driven).

 

To me it makes more sense to mark them down with one other factor - what % are likely to default (let's say 15% - I don't know what it is.) So, in your example:

 

The bank would mark down the loan to $75,000 (the value of the security) and then another 15% to $63,750. If they did that with *all* their loans (with different default percentages for prime and sub-prime) wouldn't that give an accurate picture?

 

The mortgage-backed security may not have much worth in the market, but the loan itself is worth more. Am I understanding you correctly?

[Renee in NC]

Then let private companies or individual Americans buy them and when the market rebounds (which it will) Americans will profit, not the Government.

 

I think the problem is that Americans *don't* want to buy them - either privately or through the government. The bailout bill will force the issue.

 

I thought through the option above, and I wonder what that will really solve? It doesn't free up any money, does it?

[fractalgal]

I think the problem is that Americans *don't* want to buy them - either privately or through the government. The bailout bill will force the issue.

 

I thought through the option above, and I wonder what that will really solve? It doesn't free up any money, does it?

 

Yes, right now they are worthless - probably most of them. If we are to believe that over time we will get a return from the government on them, then why not the same scenario but without the government.

 

Part of the reason the money is "frozen up" is because people are afraid to act because they think the government bailout is on the way so they want to wait and see what will happen.

Edited October 1, 2008 by fractalgal

[Robin in Tx]

To me it makes more sense to mark them down with one other factor - what % are likely to default (let's say 15% - I don't know what it is.) So, in your example:

 

The bank would mark down the loan to $75,000 (the value of the security) and then another 15% to $63,750. If they did that with *all* their loans (with different default percentages for prime and sub-prime) wouldn't that give an accurate picture?

 

The mortgage-backed security may not have much worth in the market, but the loan itself is worth more. Am I understanding you correctly?

 

Yes, you are understanding me correctly. Problem with these loans is there aren't on the books idividually, but as packages and I guess it's hard to price a package when there are so many, many loans at varying degrees of risk... surely they can come up wtih something, though.

 

In regards to comments elsewhere, it really doesn't make any sense at all to force these companies to sell off their assets at fire sale prices... not to the govt, not to individuals, nor to anyone else. The banks should be allowed to weather the process of realizing their actual loss throughout time. Nothing more, nothing less. That's my opinion.

 

I really don't understanding why anyone would object to these banks keeping the loans on THEIR books to deal with. Why use accounting methods to force them into either a bail out, or a sell out to private investors, or into failure? (oh, and guess who steps in and takes over when a bank fails - the govt... between Fannie Mae, Freddie Mac and FDIC, the govt is going to be one holding the bag in the end anyway). This is insane. Let them lie in the bed they made. The one they actually made. Not the bed as others decide to view it from day to day. I'm sure this is all coming to a head now because the write downs are quarterly, and sometime after July is when we get a peek at the 6/30 financials. That's when banks began to fail.

 

I wonder how much of the serious decline in manufacturing in August is tied to tight credit. anyone know?

 

 

ETA: Just read the article about Ford's sales dropping over 30% in September, and how they are expecting similar reports from other manufacturers. Here's a quote from the article - I'm beginning to wonder if people understand how critical the ripple effect of credit contraction really is...

 

"Dealers from many manufacturers have said their customers are having an increasingly hard time qualifying for loans to buy autos, as banks have restricted lending because of widespread mortgage defaults that led to disruptions in the financial markets and the collapse of several banks. Plus, several automakers' finance arms have limited or discontinued leasing."

 

This sort of things gets around to hurting all of us eventually. Hurting hard, too. Harder than the cost of the bail out, many would argue.

Edited October 1, 2008 by Robin in Tx

[Renee in NC]

Robin, I think the problem is that the government already (through the FDIC) insures the deposits at the banks. They already have a hand in it, so if they simply remove the mark to market rule and the bank fails because of bad debt (like WaMu), then the gov't is on the hook anyway, right? I saw the bailout as a way for the gov't to mitigate their damages by gaining more control.

 

(I have no idea if that is the right thing to do or not or whether it will work, but it is what it is.)

[Robin in Tx]

Robin, I think the problem is that the government already (through the FDIC) insures the deposits at the banks. They already have a hand in it, so if they simply remove the mark to market rule and the bank fails because of bad debt (like WaMu), then the gov't is on the hook anyway, right? I saw the bailout as a way for the gov't to mitigate their damages by gaining more control.

 

(I have no idea if that is the right thing to do or not or whether it will work, but it is what it is.)

 

Even the bail out gave a nod to lifting the mark to market rule for these particular types of assets. You are right... and there isn't going to be a JPMorgan to jump in and buy the assets of every bank that fails. All it would take is one or two more big banks to do that and FDIC reserves would be WIPED OUT. What would happen in this country if suddenly everyone's deposits were not covered by FDIC? Can you imagine the run on the banks?

[Renee in NC]

Even the bail out gave a nod to lifting the mark to market rule for these particular types of assets. You are right... and there isn't going to be a JPMorgan to jump in and buy the assets of every bank that fails. All it would take is one or two more big banks to do that and FDIC reserves would be WIPED OUT. What would happen in this country if suddenly everyone's deposits were not covered by FDIC? Can you imagine the run on the banks?

 

I see all of this as a house of cards that has come crashing down. None of this is "real" - if everyone had to go and pay back everyone they owed money too, there wouldn't be enough to go around, correct? So much of our money goes out of the country each day!

 

So, removing the mark to market rule is not an end all to the problem, right? It would still mean that there wasn't enough money to go around.

[LizzyBee]

If mark to market were relaxed, the banks would be able to carry their real estate portfolios on their balance sheet at something closer to book value. The good thing about mark to market is it can and does prevent fraud (you can't overstate the value of your assets). The bad thing is that in times like this (liquidity crisis, and instability due to panic - yes, panic), it tends to exaggerate the bad news. Everyone knows that the value of these mortgage backed securities is much more than 10% of their original value. Only 20% of homes are in foreclosure, and each of them are collateralized by real estate that is worth a lot more than 10% of the loan balance. The devaluation of these mortgages is exaggerated and temporary.

 

P.S. Many don't want to get rid of mark to market completely because they believe it prevents fraud. So there is a legitimate argument there. The package that was voted against yesterday gave the SEC the authority to suspend mark to market when immediately necessary.

 

I got an email update at work today that said the SEC and FASB are working on the mark to market issue this week, and FASB is expected to release new interpretive guidance later this week. I'll let you know if I hear anything more specific.

 

I also received another email saying the SEC issued some guidance yesterday. Here is a link to the press release which includes the guidance:

http://sec.gov/news/press/2008/2008-234.htm

 

And a link to FAQ about fair value (mark to market) accounting:

http://www.aicpa.org/mediacenter/fva_faq.htm

Edited October 1, 2008 by LizzyBee

[LizzyBee]

Here's a link to a letter from the Center for Auditing Quality to Congress in which CAQ urges Congress not to suspend mark to market accounting.

 

http://www.thecaq.org/newsroom/pdfs/CAQ_FV-Letter_MOC.pdf

[Amy loves Bud]

Can you point to one single mainstream respected economist who feels this bailout isn't necessary?

 

I don't know of any, and I do know the overwhelming consensus of respected economists is strongly in favor of the bailout.

 

 

 

Bill

 

I read this today and thought of you. ;)

[hornblower]

I think the problem with 'respected well known' economists is that their hands have been all over this mess from the beginning & they were the ones calling for deregulation of the industry. My perception is that the bailout is designed more to fix things for them than anything else.

 

There are many economists - respected academics and researchers - and not necessarily the guys wheeling and dealing, who are opposed.

http://faculty.chicagogsb.edu/john.cochrane/research/Papers/mortgage_protest.htm

 

And the editorial today in the Chicago Tribune says it very well:

http://www.chicagotribune.com/news/nationworld/chi-oped1003pressoct03,0,3142589.story

 

"Media haven't deigned to cover bailout dissent"

 

"While it is true that most Wall Street economists predict doom and gloom for America without immediate government action, many of these economists are connected in some way to the institutions that would benefit from a bailout. There are scores of respected economists who hold different opinions, but nobody is running to the University of Chicago, for example, to put its economists on national television. "

[LizzyBee]

I am confused about exactly what the bill allows the government to buy. I thought they were going to buy mortgage-backed securities. The theory that the actual mortgages are worth more than the securities would allow the government to recoup their investment when the economy rebounds. (That is my paraphrase and understanding of Robin in TX's posts on this subject.)

 

However, the latest update I got at work says this:

The House voted 263-171 on Oct. 3 to pass a massive package of tax cuts and new authority for the Treasury Department to purchase up to $700 billion in nonperforming loans from financial institutions in order to restore the health of the nation's credit markets.

 

So are they buying mortgages or securities?

If the government is buying the mortgages, are they going to foreclose on the property that secures the mortgages? The logistics of the federal government foreclosing and selling the property that secures $700B in mortgages is mind-boggling.

If the loans they're buying are already defunct, a future rebound in the economy/real estate market isn't going to restore the value of the loans.

 

This is why I was an accounting major, not an economics major. The more I read, the more confused I get.