House Republican Insurance Idea Makes Little Sense

Michael Barone does yeoman's work explaining the "insurance" idea being mooted by House Republicans:

What do House Republicans want? A senior House Republican gave me and some other reporters a look yesterday at what a working group headed by Assistant Minority Whip Eric Cantor is demanding. The senior House Republican (hereinafter SHR) has what sounded to me like an ingenious approach. He cited Ginnie Mae loans to low-income borrowers, which the government can insure. He proposed that the government (presumably through the entity envisioned by the Paulson plan) offer to sell insurance to financial institutions that hold mortgage-backed securities (hereinafter MBS). Premiums would be determined by the rates of foreclosure on each class of securities so far. Under this plan, the government would be taking in money, not paying it out. Of course, if the premiums are not enough to cover losses, the government might eventually take losses, as it did when the savings and loan industry collapsed. But losses don't seem inevitable and in any case will mostly occur in out-years, not now.

OK, we all know the devil is in the details (so is God, and perhaps He will help).

However, there are all sorts of mortgage-backed securities.  In one very common structure, there are senior claimants who get first rights to interest and principal payments (including principal payments as a result of a sale or re-financing of an underlying mortgage).  Earning a higher rate are investors on the "back-end" tranches who get paid only after the senior claimants have been satisfied.

The senior tranches are designed to be, and so far have been, pretty safe.  An unexpectedly high level of defaults and foreclosures (as is currently happening) reduces the cash flow and inflicts pain on the holders of the back-end tranches.

So who is going to pay this insurance premium?  Senior holders consider themselves to be protected by the structure of the MBS and are unlikely to pay much to insure the back-end tranches.  OTOH, the cash flow available to the back-end investors is probably not sufficient to make meaningful insurance payments - the current level of defaults is already well above expectations, so this would be something like buying insurance on a burning house. 

That doesn't mean it couldn't be done - surely there are investors in intermediate tranches who would be intrigued by insurance that could reduce their default risk at a reasonable price and currently are receiving sufficient cash flows to make payments.  But my guess is that such a program would only get at a small part of the problem.

TO BE FAIR:  A comment on the Dem obsession with executive pay - eventually there will be a Congressman with both (a) someone from his district connected to financial services who made a bundle on the Fed rescue and (b) a homeowner from the district who lost his home to foreclosure.  Political opponents of that Congressman will seize on this and the resulting headlines will drive the fool from office.

Does it make sense?  Well, it makes political sense to libs.

Comments

[Sue]

OK, we all know the devil is in the details

Yeah. Paulson's 3 pager turns into Dodd's 40 pager and here we are, republicans being blamed, again.

[clarice]

I'd be willing to give it a try before I let Dodd and Co take an otherwise so so plan and turn it into dross before its passage.I'm sort of an incrementalist and pragmatist though.

[Cecil Turner]

Yeah, but a "bailout" is dead on arrival due to its moniker alone. Dunno if "insurance" is the right answer . . . but the name is a lot better.

Methinks the average Joe isn't going to understand the mechanics of the bill anyway, so put in whatever it needs to make it work, but call it something palatable. Genius!

[TCO]

Insurance is just another way of transfering liabilities (iow speculator losses) onto taxpayers. STOP THE BAIULOUTS.

The financial sector NEEDS TO CONTRACT. Let it do so. People who have good credit and want a 20% down mortgage will get it no problem. The toxic stuff will not be happening any more, but we need to let the market STOP THIS PRACTICE, by letting losses occur.

[TCO]

Oh and I TOLD YOU SO.

You nittering nans. You girlie men. You all were so worried about being called Hoover, that you were backing the Bush bailout. Well guess what? It's the opposite of how you think. Being anti-bailout is popular. So compromising free market principles and being pro bailout DOESN'T EVEN HELP POLITICALLY!

I TOLD YOU SO. Bow down to me.

[Topsecretk9]

Financial crisis and where is teleprompter boy?

Obama, headphones, baseball hat, hitting the gym. Spotted working out this a.m. at the Washington Sports Club, near Adams Morgan/Kalorama, from 7:30a - 8:20a.

Stay tuned for more gym/Obama news...

[clarice]

Yes, Cecil.

The alternative is to just get drunk and forget about it--the market surely looks as if it's figured out something will happen.

If anyone sees TCO tell him the new Paulson-Dodd pkg which is considerably tarted up with carp was not the original one.

[sbw]

I agree that the sensible thing is to:
-- attach a Cover Page on Paulson's 3-pager,
-- title it "Market Maker",
-- label a compromise with input from House Democrats and Republicans,
-- whisper to Pelosi you'll out her, Frank, AND Obama for the ACORN ploy if she squeals.

And everyone head to the lounge to watch the debate entertainment.

[mark l.]

What this boils down to:

the house republicans will not support any bill, becuase their constituents will not understand or approve, and they will lose big in Nov.

pelosi has the majority, who should support whatever she puts out, but won't becuase they don't want to lose their seats. Without the gop backing in the house, they will get crucified in November.

the house gop will NOT provide cover, and this bill basically comes down to whether pelosi can get 218 out of 232 from her party to support it.

She can't do it.

Her options are to surrender her majority, by putting the country first, or try and keep her majority, country be damned.

remember:this is nancy pelosi-given the dem behavior post wh meeting-they would rather discuss the presdiential campaign, rahter then a looming disaster.

we have been damned...

gas up, buy dry goods, and maybe withdraw money for all the good it will do you without products on the shelf to buy.

there are two outcomes:

a bill fails in the house and we face a financial apocolypse.

a bill is passed with 'minimal, if any' gop support, and the democrats lose big in November.

Nancy's priority is keeping the house, everthing and everyone else be damned.

She might get 15 gop house memebers, but the rest she'll have to draw from her own party.

[pagar]

Tell me again why we are talking about the House Republican's plan. Unless they have some Democrats on board, it is a no starter. The House needs to vote and put their Democrats on record.

[Cecil Turner]

Tell me again why we are talking about the House Republican's plan.

Because, as usual, the Democrats don't have one.

[RichatUF]

TSK9-

Rasmussen has Obama up by 5 so I'm not so sure the GOP is gaining anything. And they really won't when the stock market crashes 1500 points on Monday with their brave stance.

Sure the Dem's want to point fingers and lard this up but the time for preening was Monday and Tuesday. The time for a deal and legistlation should have been yesterday. I'm not too sure the FDIC will be able to do the same thing they did with WaMu to about another 10-15 banks (Wachovia is probably the biggest of them) next week if this thing isn't fixed. And once the economy grinds to a halt its not going to restart in a day or two.

[mark l.]

2 pts for what it is worth:

the dems and the msm spent the past 7 years tearing away at bush, to a point where he lacks crediblity needed to be able to provide cover to get this done.

the dems also engaged in class warfare, sowing the seeds of distrust for any bailout.

seperately, they are problematic, combined, the whole is greater than the sum of the parts.

[Charlie (Colorado)]

You know, I've changed my mind: we'll be ever so much better off if we let this destroy 40-50 million people, beggar the economy, and give the Democrats control for another 40 years like it did last time. At least no one on Wall Street will be saved.

[Sara (Pal2Pal)]

So the Senate says expect a "Midnight Bill." I guess they'll all be at their respective debate parties before that.

[TCO]

I would much rather that we restrict governemnt funds to FDIC insured losses than give them to Goldman Sachs and the like.

FREE MARKETS.

NO BAILOUTS.

CALL YOUR CONGRESSCRITTER. GIVE HIM A BLAST ON THE PHONE.

[Sara (Pal2Pal)]

Charlie, if it is any consolation, you convinced me to switch from "hell no" to "okay if we must." And, I, in turn, convinced my two adult kids, who were even more negative than I was to begin with.

[Charlie (Colorado)]

Thanks, Sara.

[Sue]

Gallup has Obama up by 3.

[RichatUF]

oops:

WaMu was carved up by the OTS with the FDIC in a supporting role.

[Jane]

Charlie,

I don't see this as saving Wall Street, which is probably an error on my part. I see it as the democrats implementing socialism.

I think you are probably right, and you know a hell of a lot more than I do, but I'm still pissed.

[Cecil Turner]

I think Pelosi, et al, have finally figured out they're on the hook for this thing as well. And they need a deal just as much as the White House:

For his part, Bush acknowledged "disagreements over aspects of the rescue plan." But he also said "there is no disagreement that something substantial must be done. The legislative process is sometimes not very pretty. But we are going to get a package passed." [emphasis added]

But their taking the Treasury's plan as a jumping off point--and then adding giveaways to it--isn't going to work. So now they have to actually include the GOP congresscritters in the negotiations . . . kinda like they promised to do two years ago.

[Sue]

By the time democrats and maybe even some republicans get through with Paulson's plan, even Paulson won't recognize it.

[RichatUF]

I think you are probably right, and you know a hell of a lot more than I do, but I'm still pissed.

Then vote against every incumbent at every level on your ballot. VDH has a great piece today.

The bailout is the bill due for 30 years of fecklessness and spinelessness: pay it now when the costs can somewhat be counted or wait a week or two and watch a few zeros get tacked onto the total.

This crisis also has serious foreign policy and national security implications as our allies, and enemies, watch.

[Bill in AZ]

Stay tuned for more gym/Obama news...

Meanwhile, Sarah Palin continues to be "unavailable" and "hidden" and by the McCain campaign.

[clarice]

It's true--for the past few decades this has been pretty much par for the course on all major issues--everyone on hte Hill ignores, it postures, holds out till the abyss is in sight, then patch together some Frankenstein legislation full of tinsel and handouts and the handful of constructive people up there knowing it's the best they can get and will somewhat ameliorate a pressing problem, hold their noses and vote for it.
It's just now attention is focused on the capitol hill pork and beans operation.

[Rick Ballard]

Rich,

Wachovia is taking a hair cut today but overall the market seems to be acknowledging that the curtain is going to drop on this very low opera very quickly. There will probably be another sharp drop near the close as mutual funds balance their book but I wouldn't think a 1500 point drop on Monday is in the offing.

Paulson can implement an insurance portion under the provisions of his original plan. He may make a statement to that effect when the compromise is achieved. I like the insurance concept because it gets rid of CDS but it's no deal breaker to me.

Maybe a groundswell "replace all incumbent" movement is needed but it would just make the pigs in the prog fiefs squeal with joy. They have the luxury of the stupidest set of voters available anywhere so they're very safe.

[Jane]

Then vote against every incumbent at every level on your ballot.

Rich,

That would be Kerry, Kennedy, Deval Patrick, James McGovern, Ed Markey, - well you get the drill. It's not as if I don't do that in every election.

[matt]

tell you what, folks. Let's just forget a plan and see what happens. Monday morning, the market tanks 500 points (the limit). Global markets follow. The Republicans stand on principle as banks reduce lending and hoard cash. More banks fail. Then a few more investment banks and a couple of brokerages. People get very nervous and begin to withdraw funds from their accounts, snowballing the effect as banks violate liquidity covenants. More banks close. The president declares a bank holiday. Citibank, MBNA, Amex and other CC issuers stop issuing credit because of liquidity issues. Get the picture?

You can't go to the market without cash, you can't buy a product without cash, you can't sell anything because people don't have cash.

And because so many dollars have been flooding the system, the cash you have is devalued. Anything from overseas becomes exorbitantly expensive, including oil.

Factories close, the service economy tanks because no one can afford the services, and there are no tax revenues because no one is making any money.

We have to keep the system solvent first. Then we need to phase in strict accounting standards and sensible regulation of financial instruments. The bill for 30 years of irresponsible behavior has come due, my friends, and neither the republicans standing on their tattered principles nor the democrats with no principles are listening to the markets.

Bernanke and Paulson are very sharp at what they do and are trying like hell to be bipartisan and they are being sabotaged now by partisan politics. While Congress is fiddling, we're all going to get burned.

[Cecil Turner]

This crisis also has serious foreign policy and national security implications as our allies, and enemies, watch.

Sure it does. But if the solution recapitulates the CRA, fails to allow for adequate oversight, and then puffs it up with a ~$60 Billion in "stimulus" wealth redistribution, then it just slaps another bandaid on it . . . whilst seriously undermining our ability to fix it when we finally try to address the root problem. This is reminiscent of the old adage: When you want something really badly . . . that's what you get.

[Charlie (Colorado)]

Want to know what's happening?

Here's an economist's POV, via Greg Mankiw:

A LOT of payrolls get paid at the end of the month. The next for many companies is September 30. Three different people with hugely relevant knowledge said to me today words to the effect of: "Why don't your economist buddies want
[insert fortune 100 company/companies here] to be able to pay their employees on Tuesday. If Washington doesn't do something now, they won't be able to". That just scared the hell out of me. I can go into more details if you like, but all of them involve the four horsemen of the apocalypse.

Here's what Mankiw says himself:

I know Ben Bernanke well. Ben is at least as smart as any of the economists who signed that letter or are complaining on their blogs or editorial pages about the proposed policy. Moreover, Ben is far better informed than the critics. The Fed staff includes some of the best policy economists around. In his capacity as Fed chair, Ben understands the situation, as well as the pros, cons, and feasibility of the alternative policy options, better than any professor sitting alone in his office possibly could.

If I were a member of Congress, I would sit down with Ben, privately, to get his candid view. If he thinks this is the right thing to do, I would put my qualms aside and follow his advice.

[Joe]

Why doesn't the plan make sense? It allows the firms to re-capitalize. If a given bond is secured at 80% of par the price resets to 80% of par or the market price, whichever is higher. You essentially give a firm the opportunity to pay a premium to suspend FAS 157 mark to marking and let them do Level 3 pricing of imputed value. The financial firms have cash, but their capital ratios are sunk because of asset valuation. If AIG had been given the opportunity to increase their asset valuation(or at the very least stop the bleeding) they are an independent company today. The tricky parts are accurately predicting default rates and keeping the premiums paid to the government from turning into a trust fund with no assets.

[RichatUF]

Rick-

Wachovia is going to be someone's snack on the weekend, deal or no deal-the precedent with the WaMu deal was a real killer on some of these banks: zero for equityholders, preferred holders, and unsecured bondholders. The one thing it might do is throw some real cold water on the CDS market too seeing as quite a few of those guys are going to get bit and others try to wind down positions.

I read something at one of the links you posted yesterday that got me thinking-the bailout is really a way for the Treasury to bailout the Federal Reserve. In a way, it has some merit.

[Charlie (Colorado)]

Meanwhile, Sarah Palin continues to be "unavailable" and "hidden" and by the McCain campaign.

Oh, bullshit.

Number one: it's not true. Besides the Couric interview recently, she just did an press availabililty in New York as she toured the WTC site.

Number two, and the term has never been more appropriately applied, we're trying to prevent a Great Depression and you're complaining that Sarah Palin hasn't been interviewed by the right people.

[Barney Frank]

It's true--for the past few decades this has been pretty much par for the course on all major issues--everyone on hte Hill ignores, it postures, holds out till the abyss is in sight, then patch together some Frankenstein legislation full of tinsel and handouts and the handful of constructive people up there knowing it's the best they can get and will somewhat ameliorate a pressing problem, hold their noses and vote for it.

One of these days (perhaps very soon) they're going to find the abyss is in sight because they just stepped out into space without even a wooden barrel to ride it out. Unfortunately they're going to be holding hands with all the rest of us.

[sbw]

Please answer me this:

An insurance plan does nothing to set the appropriate level of risk for each of the MBS tranches. So how would it increase liquidity and unclog the financial arteries?

Neither would an insurance plan allow for the statistical wash of the cost of the plan -- or allow for potential profit to the Treasury.

Neither does an insurance plan penalize Wall Street as the Paulson Plan would, by confiscating any ultimate profit.

[Charlie (Colorado)]

Joe: yes, exactly.

Folks, seriously: the "don't do anything let'em all burn" folks, like Michelle and the unnameable one, have been loading up the phone lines.

It's time to call them and tell them the crisis is upon them.

If you don't know who your Rep is or their office phone, you can find them here.

[Sue]

Bernanke and Paulson are very sharp at what they do and are trying like hell to be bipartisan and they are being sabotaged now by partisan politics. While Congress is fiddling, we're all going to get burned.

So why aren't you ranting and raving at democrats for monkeying with Bernanke/Paulson's plan?

[RichatUF]

sbw-

So how would it increase liquidity and unclog the financial arteries?

It wouldn't. It may have been a good plan about 2 or 3 years ago.

[DrJ]

sbw,

You posted what I was intending to. I too don't see how insurance helps liquidity, at least not in the short term.

[Charlie (Colorado)]

So why aren't you ranting and raving at democrats for monkeying with Bernanke/Paulson's plan?

Because right now I'm more worried about the train wreck than the piggishness of the brakeman.

[Charlie (Colorado)]

... although, to be fair, I just gave Ken Salazar's phone intern a right reaming about fiddling while Rome burns.

[Sue]

Because right now I'm more worried about the train wreck than the piggishness of the brakeman.

So once again, why aren't you raving at democrats? They can pass their version without republicans.

[TCO]

Volokh.com has a good post discussing how the crisis is NOT SPREADING to sound commercial banks. The rotten banks and institutions remain under continued duress. But there is no evidence of sound entities getting dragged into the ditch. Also, Lehman's assets were sold off in 3 days. So much for all the difficulties of letting Chapter 11 do it's job.

http://volokh.com/posts/1222438938.shtml

[Extraneus]

Hey Rick, another stock tip. I'm listening this time!

So what about bonds, specifically bond funds? I see one that's down about 2% in the last week. If things go worst-case, does that go up or down?

[Joe]

Insurance travels with the bond, it doesn't stay with the entity purchasing the insurance. So if I own a dog-sh!t tranche and purchase insurance, the insurance makes that tranche more attractive to others looking to purchase an MBS tranche. I will have buyers because of the insurance, and I will be able to sell it for more than a similar tranche without insurance(assuming anyone would buy it).

[TCO]

One major justification/rationalization for the bailout is that Wall Street's crisis will trickle down to "Main Street" and lead to bank and business failures on the local level. Maybe this eventually will turn out to be the case. Yet today's Washington Post reports that community banks that were responsible lenders over the past decade are now thriving. They are flush with liquidity as depositors pour money into them and borrowers turn to them for credit. Community banks obviously cannot pick up the slack for financing for massive business transactions, so there may still be a problem there. But at this point it is not obvious that the rumbles on Wall Street will have the dire trickle-down consequences that President Bush warned of the other night when he told us that student loans, small-business loans, and car loans were in peril. In fact, it looks like there is at least some offset here:

At the same time, many smaller banks said they were actually benefiting from the problems on Wall Street. Deposits are flowing in as customers flee riskier investments, and well-qualified borrowers are lining up for loans.

"We collect money from local savers, and we lend it in the local community," said William Dunkelberg, chairman of Liberty Bell Bank in Cherry Hill, N.J. "We're doing fine. There are 9,000 financial institutions out there, and most of them are small and most of them are doing fine."

Dunkelberg, a professor of economics at Temple University and chief economist for the National Federation of Independent Business, added that a recent survey of that group's members found that only 2 percent said getting a bank loan was the great challenge facing their businesses.

"If you can't get a loan, my advice is to go see your local community bank," Dunkelberg said.

***

We're drowning in liquidity because people are pulling money out from other places and depositing it with us," said Peter Fitzgerald, chairman of Chain Bridge Bancorp in McLean. "Our bank has benefited tremendously."

Fitzgerald, a former senator from Illinois whose family has been in the banking business for generations, said the current situation struck him as similar to past downturns.

"The banking system did need to slow down," Fitzgerald said. As it does, riskier customers are being turned away. At the same time, banks that overextended are now forced to turn away even good customers. The challenge for Chain Bridge, he said, is identifying the worthwhile customers. The bank has plenty of money to make good loans, he said.

Nor are small bankers the only ones who object to the bailout. John A. Allison, CEO of BB&T Bank, also objects to bailing out irresponsible bankers (HT: Division of Labor):

There is no panic on Main Street and in sound financial institutions. The problems are in high-risk financial institutions and on Wall Street.

While all financial intemediaries are being impacted by liquidity issues, this is primarily a bailout of poorly run financial institutions. It is extremely important that the bailout not damage well run companies.

Corrections are not all bad. The market correction process elminates irrational competitiors. There were a nubmer of pooerly managed institutions and poorly made financial decisions during the real estate boom. It is important that any rules post "rescue" punish the poorly run institutions and not punish the well run companies."

Finally, he adds an observation that expresses a conern that I have shared from the beginning, which has led them into missteps and unintended consequences already:

The primary beneficiaries of the proposed rescue are Goldman Sachs and Morgan Stanley. The Treasury has a number of smart individuals, including Hank Paulson. However, Treasury is totally dominated by Wall Street investment bankers. They do not have knowledge of the commercial banking industry. Therefore, they can not be relied on to objectively assess all the implications of government policy on all financial intermediaries. The deicison to protect the money funds is a clear example of amaterial lack of insight into the risk to the total financial system.

In fact, the community bankers mentioned above tend to vacation at the Jersey Shore rather than the Hamptons, and fly commercial rather than charter, so Mr. Paulson may not actually have had the opportunity to speak with them about the bailout. (Sorry, I couldn't resist at least one dig.)

[sbw]

(H/T Instapundit) Ten minutes well spent. How we got into this mess. How we get out.

[jcox31mc]

I believe that the Republicans should push for the vote and then make an Obama vote: "Present", and then spend the rest of the time pointing out all the problems with the bill, Obama's positions (if they can determine them) and his past "present" history. Anything that the Dems say should give the R's a talking point for the American people, of how Obama has acted, and voted in the past. He's a scam.

[DrJ]

Sure, Joe, insurance increases confidence for the MBS. I don't see how this "gets you over the hump" when you have little idea of the short-term value of the underlying securities. Is the insurance enough to cover a loss? I sure don't know. Paulson's approach is much more brute force, but it does give a value to these things.

[Charlie (Colorado)]

TCO, the minute a company like, oh, Kroger, has to tell its employees they can't cash their paychecks (see the Mankiw link above), that will change.

Thanks for Managing to only use caps in appropriate places, and not demanding coprophagy, though.

[Jim Ryan]

coprophagy

pwn3d

[Rick Ballard]

"Hey Rick, another stock tip. I'm listening this time!"

I don't believe I've ever given a specific stock tip here. Jim (Vnjagvet) asked about Wachovia CDs and I mentioned that BAC seemed a safer bet. It still is, although the Wachovia CDs will be made whole.

I believe that the market is a good investment at this level, for those with the stomach to watch it (possibly) drop another 10% before it picks up. That's "investment" not "trade". Pick the lowest cost, lowest fee fund manager (HINT: Start with V's) and then pick a fund that matches your appetite for risk and reward - which will be different than mine.

[RichatUF]

Cecil-

When you want something really badly . . . that's what you get.

That's what I get for thinking that Dem's would put the good of the nation before the good of party and constituency service. It does appear that the Dem's did try to undercut the GOP with their theatrics over the last couple of days too and the GOP is rightly pissed off.

However, the solution has to involve the US government purchasing these MBSs at some discount to liquify the banks and get them off the banks books because the scope of the problem is just too large.

US taxpayers sent the same reps to Congress for years and the various warnings and alarms regarding housing did nothing. Watching a real deflationary recession cycle take hold because Dem's aren't taking any blame for this and don't really seem to be serious is cutting our noses to spite our face.

TPG took a pretty sizable loss on WaMu last night, no other private players are going to step up to the plate without some sort of chair in place.

[Joe]

DrJ, the short-term value is the insured value of the bond. If you are insured for 50%, then the value of the bond is at least 50%. The market price may be less, but you don't have to price mark-to-market if you have secondary valuations that differ and you can justify those valuations. A bond insured at 50% trading at 20% is a pretty easy justification. Once you can re-inflate the value of the bond and put in a floor many firms will happily sit on the bond to maturity. The 'liquidity crunch' is too many sellers looking to stop the bleeding and too few buyers willing to take on the risk. Dry up the forced sellers and lower the risk and you solve your hump. Confidence is the 'hump'. If you can restore confidence, you reduce/eliminate the hump.

As an added benfit, since the current holders of the bond are the ones buying the insurance, you are 'punishing' the person who made the bad investment thru the insurance premium. Once a few firms start purchasing insurance, the entire market will be forced to. If I can buy a bond that is insured, or one that I have no idea what the down-side exposure is it doesn't take a genius to figure out which one I'm buying. If you want to move anything in the next few quarters you will need insurance backing the bond.

[DrJ]

to liquify the banks

That's one big blender!

Sorry. Couldn't resist...

[Barney Frank]

Thanks for Managing to only use caps in appropriate places, and not demanding coprophagy, though.

LOL

No demands for self immolation or seppuku either. Must be cycling between poles.

[Rick Ballard]

"Once you can re-inflate the value of the bond and put in a floor many firms will happily sit on the bond to maturity."

Yep. Pretty near every single pension fund in the United States of America has a chunk of these deals and will cheerfully sit on them until they mature. They don't intend to sell them and they are acting prudently by not doing so in a market which has frozen.

[DrJ]

the short-term value is the insured value of the bond.

Ah. Of course that's right. I still have no opinion on which approach is more suitable, but at least I now understand the rationale.

How would one set the insurance rate (neglecting the issues Tom did in his post above)?

[RichatUF]

I did write that didn't I?

[DrJ]

Must be cycling between poles.

Too early to start drinking, it seems.

[Charlie (Colorado)]

Too early to start drinking, it seems.

Not today.

[Joe]

I'm not in insurance, but I don't think the insurance rate would matter. If you insure for 50%, then the premiums are lower but the resale value would be lower as well. If you insure 80%, premiums are higher but resale is higher.

Think of it like your deductible on home/car insurance. You can save money on the front end, but can really take it in the shorts in the event of big loss. But its still better than having no insurance at all.

[Extraneus]

And past performance is no guarantee of future returns? (Don't worry, I was just marveling at you having called it last Thursday, and E.F. Hutton hasn't spoken on the subject in a while.)

[DrJ]

Right, Joe, but that's not my issue. The rate (for whatever coverage you want) has to reflect the risk. Otherwise, it becomes an insurance problem if these start to fail and the "policy" has to pay out.

[Barney Frank]

I'm doing a real world test of the credit markets for you guys.
I am carrying a substantial note on a piece of timberland I sold to a private individual.
Since the market is so gawdawful I decided to sell the note. It's pretty short term and the guy I sold to has a FICO around 770 and put about 45% down.
Two bids so far, one at 87% of value and one at 90%. The guy at 90% isn't even asking for an appraisal.
If my note buyer bails before the deal closes I wonder if Hank would be interested in taking it off my hands.

[hithere]

McCain supporters are around here are for the most part delusional.

To readers of this blog, please make sure you consult a wide array of information sources and make your own decisions.

The regular posters here are so partisan as to be enemies of truth, or they don't know anything and rely on those partisans.

Think! It ain't illegal yet!

[Mike @ Naught Relevant]

I like my plan better. Here's a snipet:

Granted I am only a dumb beat cop and may not have developed a deep understanding of economics beyond street corner crack dealing (it’s all the same principle, right?), but I do have to ask: Why are we now bailing out Automakers? There are plenty of used cars out there. If someone needs a replacement car, let them buy used, or fix the one they have. The reality is when most people buy a new car it because they want one and not need one.

Let the dice roll. Let the chips fall. (Insert your own metaphor here). The Auto companies are run poorly and they should be left to run their courses. If I really need a new car I can buy a Toyota or a Honda. I might even buy a Scion if needed. It is only transportation.

And for the record, let the banks and mortgage companies fail too. Then re-write all of the failed mortgages at a low rate for 30 years fixed. Don’t funnel the fix through the people who screwed it up.

We used to have a marketplace to solve these problems. Now, like with everything else, we want Uncle Sam to fix it. If this is still the America I grew up in, someone will step in and takeover to fill the void. If there is a void.

If we are that desperate to give the people hundreds of billions of dollars, then we should freeze or halt the pay of management and executives and board members. NO BONUSES!! NO STOCK OPTIONS!! NOTHING!!

[RichatUF]

Otherwise, it becomes an insurance problem if these start to fail and the "policy" has to pay out.

Which is the problem with the cds market now, don't see how larding up another level of "insurance" on these things would make them worth more.

[JM Hanes]

For anyone looking to make some noise, you'll find Dodd's proposed ACORN Provision here in:

TITLE I: "Authorizing the Treasury Department to Buy Mortgage-Related Assets"
Section 5d: "TRANSFER OF A PERCENTAGE OF PROFITS."

Here's a link to Senate contact forms. You can click through to your Representative's home page from the House website.

The Public Markup site, which I've just discovered courtesy of HotAir, looks worth bookmarking.

[Joe]

Sorry, I didn't understand. The premium charged is a factor of the default rate. I would expect that we are at or near the top of defaults, so if we used the current default rate plus a slight fudge factor we would come pretty close to a risk free proposition on both sides. If some of the big brains working on this expect another default spike in the next year, then they would need to use that rate to determine the expected losses and spread that risk to all bond holders as premiums charged.

[Sara (Pal2Pal)]

This is a question from a family member.

My d-i-l has her checking/savings with WaMu. She got paid this morning and when she went to her branch, there was a sign saying they closed early, but would be open on Monday for normal business. So, she couldn't deposit or cash her paycheck. She needs the money for the weekend, so she decided to cash it at Albertson's (grocery) and they wouldn't cash it because it is written on a WaMu account (the business account of her boss).

She gave me the check and I deposited in my checking account at Wells Fargo and gave her enough cash for the weekend. I expect the paycheck to be honored so I'm not worried, but I am now wondering what happens to those (like myself) who have all their deposits done by "direct deposit." My d-i-l was not able to use her ATM card to either deposit or withdraw money at WaMu. As far as I know, Wells Fargo is okay, but my d-i-l's experience this morning is making me wonder if all of us should worry about money that goes into our accounts by DD that then might not be available for a period of time due to a bank being one of the troubled ones?

[Rick Ballard]

Rich,

It only makes sense in lieu of the CDS market, not on top of it. Why would a CDS be necessary if something akin to FDIC insurance was available? A CDS is a time sensitive instrument with an expiry date. The Fed could begin the auction process on MBS with close expiry dates.

[matt]

the fundamental problem is liquidity. For anyone invested in mortgage backed securities, which is pretty much all of Wall Street, that means everyone. Small banks will get hit with the same tidal wave as everyone else if suddenly the majors all take a dive. All credit will be devalued significantly, and the loans that keep America solvent will disappear. As a businessman, I depend on those lines of credit. Without them, we can't do business and would have to lay off employees. Imagine this on a national, and then an international scale.

The snowball has already started (FNMA, WaMu, Merrill, Lehman, Freddie), and Bernanke and Paulson are trying to slow it down. A Rube Goldberg plan such as the republicans have proposed will not convince Wall Street or overseas markets of our gravitas. The fix has to be straightforward, transparent, and sustainable.

[Charlie (Colorado)]

Why are we now bailing out Automakers?

Because no one was paying attention to a mere $25 billion, so the D's slipped it in.

[Verner]

Screw Pelosi and Reid. They tried to ramrod this bill through, will all their social engineering fluff--without ANY input from House Republicans.

There was NEVER any deal.

The way this bill stands, it will not solve a thing. It will simply postpone the inevitable.

The banking system needs REAL reform. It does not need to continue to be a vehicle for Democrat socialist engineering and wealth redistribution.

It's the Pottery Barn theory of economics.

YOU BROKE IT, YOU FIX IT.

Democrats got us into this mess, now they can get us out by passing a bailout all on their lonesome. They are the MAJORITY. And if bluedogs go down--too damn bad. It's what they get for putting Frank, Dodd and Pelosi in positions of power.

So to all the Republicans in congress--they can't blame you! With party discipline, they've got the votes to do whatever they want. Make that clear to the public.

If we go down, it is PELOSI'S FAULT because she's a FREAKING COWARD who loves the democrat party more than AMERICA.

And another thing. I just heard that the reason the meeting broke up yesterday was because someone at Goldman slipped Obama the house republican's plan in advance. They were ambushed. If that is true, and Paulson--a democrat--is working in concert with the Obama campaign--he needs to go. NOW. His first loyalty is obviously not with the American people.

[Barney Frank]

Why are we now bailing out Automakers?

The $25 billion they're getting was mandated earlier in a bill forcing CAFE standards up along with other green BS. Ostensibly it is to assist them in these endeavors.
Of course the solution is to repeal the dumbass greeny law and save the $25 billion but that's not likely in this environment, to make a poor pun.

[Charlie (Colorado)]

Sara, JPMC (the buyer) has said that all WaMu operations will continue and are completely covered by Chase, which is in pretty good shape. Here's the Morgan/Chase link and here's the story at Consumerist.

[Charlie (Colorado)]

The way this bill stands, it will not solve a thing. It will simply postpone the inevitable.

Verner, I'm completely sympathetic, but given that the "inevitable" here is paychecks bouncing on Tuesday, I'm happy to have a postponement.

[sbw]

The ironic laugher is that Pelosi and Reid dug their heels in on a deal because they didn't want to be saddled with the blame.

By not signing on to Paulson, they are almost guaranteed to find out what it means to be saddled with the blame.

Big time.

[Charlie (Colorado)]

Oh, and Verner, Paulson was an aide in the Nixon White House; why do you think he's a Democrat?

[Sara (Pal2Pal)]

This is an interesting interview with Jim deMint this morning. It explains better to me, at least, why China's move to close credit to the U.S. meant something yesterday.

An Interview With Jim DeMint On The Bailout Crisis

[bad]

Krauthammer has some interesting ideas:

Capping executive pay is piffle. What we need are a few exemplary hangings. Public hangings. On television. Pick a few failed investment firms, lead their CEOs in chains through the canyons of Manhattan and give the mob satisfaction. Better still, precede the auto-da-fé — fire is highly telegenic — with 24-hour reality-TV coverage of their recantations, lamentations, and final visits with the soon-to-be-widowed. The ratings would dwarf American Idol, and the ad revenue alone would make the perfect down payment on the $700 billion.

Why not save the CEOs for dessert and serve up Dodd and Barner Frank for appetizers, Pelosi and Reid as the main course.

[bad]

***Barney**

LUN

[Sara (Pal2Pal)]

Charlie: Thanks. I had already read that WaMu accounts would be covered, that is why I was willing to deposit her paycheck in my account and give her the money. If they don't then I'll be in trouble, but I'm not worried.

My question was more to those, like myself, who have all their income set up as direct deposit. If I couldn't use my ATM for even a few days, like is happening to my d-i-l with hers at WaMu, I would be in majorly big trouble. I don't bank with WaMu and as far as I know, my bank, Wells Fargo, is fine.

BTW, about 45 days ago, I cashed out the last CD I had left that was part of my Mother's estate and it was at WaMu. I am really glad I don't have to deal with that, it was already complicated by the fact that it was jointly held by myself and my Mother and she is deceased, so I had to present all kinds of documentation.

[Charlie (Colorado)]

Sara, from reading that news release, it sounds like she might even be able to use her ATM card now, at least at a WaMu machine.

[DrJ]

Rick,

A CDS is a time sensitive instrument with an expiry date. The Fed could begin the auction process on MBS with close expiry dates.

So how would the transition be handled? It would seem that those MBSs with existing CDSs (namely, all) could only be insured once those CDSs expired. That wouldn't help liquidity unless a lot of them expire, well, now.

[Bill in AZ]

Meanwhile, Sarah Palin continues to be "unavailable" and "hidden" and by the McCain campaign.

Charlie: Oh, bullshit....

Charlie - sorry, it was an attempt a sarcasm pointing out the absurdity of the MSM. TS9's post pointed out the stupidity of the MSM camping out on The One's doorstep so his gym visit made national news this morning. And not a peep about Sarah other than disgusting hit pieces by snarky idiots like perky Katie.

Sarah being "hidden" is kinda like a kid getting his brother in trouble, pulling his shoulder way back and holding his hand out just past his chest whining that brother won't let me play with his toy - when he could easily reach it.

[clarice]

JPMorgan says go on banking as you always did with WaMu--everything is running just as it was before JP took them over, Sara.

[Charlie (Colorado)]

Oh, sorry, Bill. I've gotten that one, offered seriously, about 19 times in the last week on the various rumors things. Didn't catch that you meant is ironically.

[Rick Ballard]

DrJ,

The existence of such government sponsored insurance would jerk the CDS market into reality very quickly - if it didn't then a bridge policy, written by the government, would do the trick. Currently, the CDS market is acting (perhaps inadvertently, perhaps not) like an executioner who will only be paid when the job is done. The "cause" may have something to do with the fact that many CDS writers don't have anything remotely close to the reserves required to pay up.

[JM Hanes]

Verner:

"If that is true, and Paulson--a democrat--is working in concert with the Obama campaign--he needs to go. NOW. His first loyalty is obviously not with the American people."

Huh? If he thinks House Republican proposals are crap for the country, why wouldn't he try to shoot them down as quickly as posssible. If he wants to get a bill passed over their objections, why wouldn't he be working the Democratic majority as hard as he possibly can?

Rich & Sue:

Rasmussen has Obama up by 5 so I'm not so sure the GOP is gaining anything. Gallup has Obama up by 3.

I'm not sure when polls have ever been less relevant than they are right now. I know it's a hopeless cause, but the less attention pols pay to the polls right now, the better. I certainly hope we won't see the Maverick in such thrall. Even as an average voter with the benefit of discussions here, I have nothing remotely resembling a truly informed opinion.

In any case, aside from the fact that it's not over till it's over, I don't even bother to look at polls till at least three days out -- to see where we were three days ago. As a rule, it seems to me that it takes that long for opinion to settle, whether you're looking at daily or rolling averages. Given the recent volatility, both within and between polls, even before the financial crisis came to a head, I don't think drawing any conclusions from the numbers as they immediately emerge makes any real sense at all.

[Verner]

Charlie, as I said, there is NOTHING keeping the democrats from passing this bill.

So they need to go ahead and do it.

Why in the hell should a single republican in congress work with them, when any meaningful reform has been pushed aside--and instead, we have to pay for not only the mortages, but the student loans, credit card debt and car loans for every worthless doper and scam artist in the country (aka the democrat base).

There is no reason that Reid and Pelosi can't walk right out on the the floor and pass this thing right now. And if they want all that crap in the bill they want in the bill, by all means, go do it. And if they don't, and chicken out, it is THEIR FAULT. THEY are the Majority.

[Sue]

JMH,

I'm not watching the polls for the actual numbers. I watch for the trends. Right now, the numbers trending towards democrats, all over the place, not just the presidency.

[Sue]

In 2001, democrats rammed a recovery package through. Over 600 billion dollars. To help us recover after 9/11. Full of pork. And then spent the next 7 years blaming republicans for the deficit. ::sigh::

[Verner]

Rick:The "cause" may have something to do with the fact that many CDS writers don't have anything remotely close to the reserves required to pay up.

And that's why we're in this mess now, isn't it. And what does the 700 billion dollar bailout do to correct the situation?

[clarice]

Looks like the market closed up--either traders are drunk or they think something will get worked out this weekend. I think it will--I think everyone will hate some part of it..In other words why is this day (on Capitol Hill) different than any other day?

[sym]

Anyone here know which bailout plan McCain supports?

[Sara (Pal2Pal)]

I'll tell her to try her ATM again when she gets home from work this evening. This morning, the machines were all closed, at least at her branch, which was also closed with the note saying they'd be open again Monday.

I'm just trying to get the ducks in a row because as much as I love my d-i-l, you always have to be ready for the "freak out" problem and she is very unsophisticated about the simplest of banking matters. Before she came under my influence, she'd never had either a bank account or a credit card, despite working all her adult life and raising two kids on her own before she met my son a few years ago. She is definitely a keep the money under the mattress kind of gal. She hates depositing her check, feeling like once it leaves her hands it is lost. I finally showed her how to check her balance online and then I realized she does it several times a day. You can imagine the level of "freak out" this little incident with the bank this morning caused. When she finally left the room, my son complimented me on having the restraint not to burst out laughing. I told him I would never embarrass her like that, but he wasn't buying. Said he could see the twinkle in my eye, even if she didn't notice it.

[Verner]

JM, the point is that not ALL of what the Rebublicans are proposing is crap by a longshot. But by doing what he did, Paulson completely undermined any chance they had of getting imput into the plan--or even discussing alternatives.

Paulson made it so that they had virtually no bargaining power to protect OUR interests. Obama basicly had a "my way or the highway" approach, with Paulson backing him up before any discussion began.

I've read that Paulson is now a democrat. Can't tell you the source. He may have served with Nixon, but that was a long time ago.