Are We Winning Yet?

Any moment now (or within two weeks?!?) Paulson et al will commence spending $250 billion to buy troubled assets.  Presumably they are spending the weekend planning their first purchases (auction or direct?) and thinking through their implementation of the requirement that warrants be associated with every purchase.

On the other side, I have no doubt that some enterprising firm is noodling the possibility of acting as a conduit or straw seller.  If, to pick a name at random, Goldman Sachs wants to unload troubled assets but does not want to offer warrants or be subject to any rules about executive compensation, it might arrange to sell their securities to NewCo, which then sells them to the Treasury.  Moe mud in the water.

So what metrics will the Treasury and the markets be monitoring to see whether this rescue package is succeeding?  An obvious measure of financial distress is the TED spread, the difference between 3 month T-bills and 3 month LIBOR deposits.  However, the London interbank market is not a natural home to US regional banks, which have certainly been a part of the financial freeze-up - the widely used British Bankers Association survey to establish US dollar LIBOR relies on these banks:

Bank of America 
Bank of Tokyo – Mitsubishi UFJ
Barclays Bank plc
Citibank NA
Credit Suisse
Deutsche Bank AG
HBOS
HSBC
JP Morgan Chase
Lloyds TSB Bank plc
Rabobank
Royal Bank of Canada
The Norinchukin Bank
The Royal Bank of Scotland Group
UBS AG
West LB AG

The bill-LIBOR spread will pick up international credit woes but may not be a useful proxy for US regional banking problems.

Problems in the commercial paper market made the news.  The Fed reports both rates and amounts outstanding in the CP market so signs of progress may be visible there.

Another suggestion - the Fed provides a weekly report on aggregate bank reserves.  Do note the extraordinary jump from Sept 10 to Sept 24 - after ranging between $42 and $47 billion over the previous year, reserves on Sept 24 soared to $109 billion, including $69 billion of "excess" reserves not needed to satisfy regulatory requirements.  Banks were sitting on reserves rather than lending them, which the Paulson plan is meant to change.

I welcome other suggestions.

Comments

[cathyf]

Hey, just to be obnoxious and start off-topic... Can somebody point me to the troll-blocking add-on for firefox? I finally decided to check out FF3, and I suppose it's ok. A lot slower than opera :-( And I'm really missing that thing where you get to the end of the thread and hit the space bar and it goes to the next thread -- anybody know an add-on to get that?

(Hey, I'd consider myself a winner if I have one or both of those!)

[hrtshpdbox]

I really don't know much about it, but I think the purchases will be direct and not by auction, and that a goodly portion of the efficacy of the plan will be in the confidence it engenders that there's a buyer of last resort. The U.S. made money on a Mexican bail-out a few years back; other entities with the wherewithal to do so might jump ahead of the Treasury this time around.

One thing I DO know, though, is that Tina Fey will be doing her Sarah Palin thing tomorrow night, with Queen Latifah playing Gwen Ifill. I guess they can't depict Palin as retarded anymore, so they'll probably have her winking repeatedly into the camera. Somehow I'm not afraid...

[Pauld]

Here is an interesting post that suggests that the bailout plan may make the commercial paper market much worse. The argument makes sense to me, but I don't have a degree from Harvard, like Barney Frank. http://www.nakedcapitalism.com/2008/10/more-discussion-of-why-bailout-bill.html

[TGO]

so they'll probably have her winking repeatedly into the camera

I hope Tina gets some nice big flashcards so she doesn't forget what she's supposed to say! Wow, would that ever be embarrassing! And I hope she keeps them hidden so people don't know she's using flash cards, because that would be even more embarrassing, LOL!!!

[Charlie (Colorado)]

It looks like the argument has a couple of assumptions that are probably flawed.

The first assumption is that Paulson and Bernanke are idiots and don't know how to manage a big security purchase or sale to minimize market impact, and so are going to throw $250 billion of new T's on the market all at once, while waving around big wads of cash saying "sell me something!"

It seems unlikely in the extreme that Paulson got to be CEO of Goldman without knowing how to manage a big block transaction, so I think that once can be discounted.

The second assumption is that Paulson has to sell the T's first, before he can start buying. I don't think that's true; he can just start writing checks, basically tonight, against "full faith and credit." This would normally be inflationary, but what I've read suggests that we're having a major deflationary event right now, of a size lots bigger than even the $700 billion, so that shouldn't be an issue. So, Paulson can start buying up illiquid paper without impacting any of the money markets for the moment.

The third on is that all the MBSs have to be cleared before the credit markets will unlock. At least based on the model we've been talking about --- liquidity crisis caused by a need for cash to clear swaps --- I wouldn't think that's true, especially with the relaxation of mark-to-market rules. Now, as soon as Paulson buys anything, that whole class of securities, anything that is close enough to the one note that Paulson buys, will once again have a value; balance sheets will reflect real assets again, and the revised guidance will give the companies a chance to avoid having to react to every panic sale with a global markdown. That, along with the fact that Paulson has authority to continue, should cause the credit markets to return to some kind of normal operation. Some companies may not --- their exposure may be great enough that they still will really be insolvent when the paper gets a real value --- but people will at least know what the values are, and so can make rational risk-management decision again.

[TGO]

A major change in the Goldman outlook is the increase in the unemployment rate to 8% in 2009 (their previous forecast was for unemployment reaching 7% in 2009).

One of the features of recent recessions is that the unemployment rate kept rising for 18 months to two years after the recession officially ended. This suggests that the peak unemployment rate (for this cycle) might not happen until 2011, even if the recession ends in late 2009

trickling down

[hrtshpdbox]

"I hope Tina gets some nice big flashcards so she doesn't forget what she's supposed to say!"

You mean like Obama uses everywhere he goes, so that he doesn't forget how many states there are, and that he's no supposed to make up U.S. troops military atrocities - stuff like that?

[Rick Ballard]

I don't see how the TED could work. There are five stinkers on that LIBOR list, Citi, Credit Suisse, Deutsche, HBOS and UBS. It's difficult to see how LIBOR could straighten out without knowing the counterparty exposure involved with at least the market makers. They're all saying "we're OK, no problems" but the UBS announcement that they were dumping commodities in order to 'focus on our core business' wasn't exactly heartening.

Perhaps the first indicator to watch is the 3 month Treasury rate. The interplay between maturities is easy to follow and a fair indicator of market sentiment.

I can't see how the private markets can regain stability until the CDS auctions for Lehman, Fannie Mae and WaMu are over. Those auctions will definitely separate the sheep and goats as well as providing market valuation info on a chunk of MBS paper.

The Wells Fargo open market offer for Wachovia (no help from Uncle Sugar) is supported by valuations of a bad pool of MBS - that's a start before Paulson even loads his gun.

[TGO]

U.S. troops military atrocities

I see you're a collector! Those are from the Cheney/Rumsfeld Limited Edition Collection.

[M. Simon]

Bail Out May Hurt - from Naked Capitalism

[Sara (Pal2Pal)]

Video Shows Obama Youth Preparing For Era of Hope & Change

[MayBee]

OK, everybody knows Palin didn't have flashcards at the debate, right? No written notes at all were taken into the debate or allowed left on the podiums for the candidates. Debate orgainzers left blank pads and pens on the podiums for the debators.
Anything she read during the debate was something she'd written while Biden was talking. Ditto in the opposite with Biden.

[Elliott]

But what about the earpiece? That's how they worked it in American Dreamz.

[bad]

I heard Palin's flag pin was a direct feed from Rove. If you play clips of the debate backwards, you can hear him plain as day.

[M. Simon]

She had a cochlear implant with a special antenna under her hair.

That is why they kept her away from every one for the first week. Time to do the implant and let the skin heal.

[pagar]

Good Morning to All!
Looks like another beautiful day.

[hrtshpdbox]

"If you play clips of the debate backwards, you can hear him plain as day."

I heard that too. And every time Rove couldn't resist the urge to say "Paul is dead, I buried Paul", Palin would just say "hockey moms".

[bgates]

cathy - LUN for finding and installing troll blocker.

[Jane]

Morning everyone. Bill Burton is such a troll.

[Pofarmer]

So, have mark to market rules been relaxed?

If not.

What happens if the original offers trigger a wave of CDS?

[Pofarmer75]

Another question from one of the links Tom provided.

What does it mean that Federal Reserve Balances with Federal Reseverve Banks went from 9.4 billion to 75 billion from Sep 10th to the 24th???

I also note the Fed purchased some commercial paper on the 24th.

[Neo]

Has anyone heard about a 1991 case ..
Buyck-Roberson vs Ciitibank Federal Savings Bank ?
It was decided in 1994.

[Pofarmer75]

From the WSJ.http://online.wsj.com/article/SB122307836192004059.html

Unsecured creditors of Lehman Brothers Holdings Inc. asked a court overseeing the securities firm's bankruptcy proceedings for permission to investigate how Lehman ran out of money.

The creditors' group alleges that J.P. Morgan Chase & Co., which acted as a financial middleman between Lehman and other lenders, helped spark a "liquidity crisis" at Lehman before the firm filed for Chapter 11 bankruptcy proceedings earlier this month...

[Pofarmer75]

Neo, I think Rich linked to some info in it in another thread. Is that the on where Barack Hussein helped sue citibank to get more subprime loans?

[Neo]

This look interesting .. Obama Sued Citibank Under CRA to Force it to Make Bad Loans

[Neo]

CHICAGO — At a tumultuous meeting of anti-Vietnam War militants at the Chicago Coliseum in 1969, Bill Ayers helped found the radical Weathermen, launching a campaign of bombings that would target the Pentagon and United States Capitol.

Twenty-six years later, at a lunchtime meeting about school reform in a Chicago skyscraper, Barack Obama met Mr. Ayers, by then an education professor. Their paths have crossed sporadically since then, at a coffee Mr. Ayers hosted for Mr. Obama’s first run for office, on the schools project and a charitable board, and in casual encounters as Hyde Park neighbors.

[Pofarmer75]

Interesting. Looking at the Dow chart the move on Friday could very well be a Bear Flag. From sideways trading, you have a higher high, lower low, and much lower close, Plus, it's below the low on Friday that started the Sideways movement to yesterday. Trading Monday will be interesting.

[Pofarmer]

Geez, Palin Biden draws 1/3 more viewers than the presidential debate from drudge.

[bio mom]

Debate was on a Thursday night, not a Friday night. Thus the increase.

[Porchlight]

Yes, bio mom, but the difference in scheduling can't explain a 33% difference.

This was the second most watched debate of all time, Pres. or VP.

Palin is the reason.

[cathyf]

So, have mark to market rules been relaxed?

If not.

What happens if the original offers trigger a wave of CDS?

Well, if I understand the MTM issue correctly, the problem is that the positions have already been marked to zero. So unless the Fed offers "negative" amounts ("Sure, we'll take those MBSs off your hands if you throw in $X and a free toaster") any offer at all will push the CDSs firmly into a state where they cannot be exercised.

[Barney Frank]

I hope Tina gets some nice big flashcards so she doesn't forget what she's supposed to say! Wow, would that ever be embarrassing!

Since it's Paladin Obama (have telprompter, will travel) who needs the little screen in front of him I guess Cleo is doing a little 'projecting'.
Sorry, kinda lame but worth a shot.

[PeterUK]

"This was the second most watched debate of all time, Pres. or VP.

Palin is the reason."

Nah,this was the hair plug community showing solidarity with Biden.

[Cecil Turner]

Twenty-six years later, at a lunchtime meeting about school reform in a Chicago skyscraper, Barack Obama met Mr. Ayers, by then an education professor.

Yeah, sure. You don't believe him, just ask him! And he certainly didn't meet him after 1995.

[royf]

Barney Frank have you seen the Strata-Sphere video of Obama talking to his ear piece? it's hilarious.

 

"Is Obama actually a puppet on a String?"

[Pofarmer]

Thanks cathyf.

So, what happens to all this CDS paper floating around out there with this plan?

Also, a question for the other economists.

It's been pointed out the mechanics of the MBS should be non-inflationary. But, isn't the whole reason for doing the swap to inject more money into the credit markets?? Granted, it won't be the total amounts.

[Charlie (Colorado)]

Cathyf, if I'm reading things correctly, there are a lot of credit events other than actual no-pay default that can allow a CDS to be exercised, many or most of which have probably already happened --- rating downgrades, for example.

What does happen, though, is that it turns these CDSs into mechanisms for turning billions in cash into worthless paper into a machanism for turning cash into something that does have a market value, even if it's a loss.

[Charlie (Colorado)]

Po, there are a bunch of deflationary things happening right now, which --- again macro isn't my strong point --- which I understand have taken trillions out. So adding a few hundred billions back in should just balance some of it out.

[clarice]

Pofarmer--all this flag stuff reminds me of astronomy--when I look up at the sky and see all those twinkling lights, everything looks like the constellation I was looking for.

[joan]

oh, goodness, I was wrong -- TGO is more repulsive than TCO, couldn't be the same person.

[Porchlight]

OT,

Rasmussen poll has Biden winning the debate 47-35, but look at how the poll was done:

1* How much of the Vice-Presidential Debate did you watch live last night?

58% All of it

19% Most of it

14% Some of it

8% None of it

1% Not sure

So 8% of people polled didn't even watch it. That means they got their opinion afterwards, likely from the MSM.

[glasater]

Cavuto just finished a two hour forum of sorts on the ramifications of the rescue plan.
He started out with Jesse J--and you know where his interests are--and ended with Art Laffer via telephone.
Laffer said he moved out of CA because of the mess that state is in and he also said he is scared of what is happening to the economy of our country.
When Laffer is scared--I'm very scared.

[Pofarmer]

Charlie.

At the wholesale level things have been insanely inflationary for a couple or three years now. Look at a long term grain chart. Look at a long term steel price chart. Right now, scrap steel is selling for twice what new steel was around 4 years ago or so. Plate and tube right now is $1.35 lb. About 3 years ago it was $.35/lb. Fertilizer prices have tripled in less than two years. At this point we NEED some deflationary things to happen. This deal has gotten way overheated. We NEED a correction.

[Porchlight]

P.S. Palin won independents in the above poll, 44-39

[Pofarmer]

Ya know Porchlight. I've never really talked politics much with local folks before. Right now EVERYBODY is talking politics. I'm hearing an awful lot of "I like what Obama says, but I just don't trust him." McCain can hammer him easily on all this, if he just will. It's not so hard to point out the Obama was involved in a lawsuit that started this whole mess. It's not that hard to point out his ties to a group involved in massive voter fraud. It's not that hard to point out he blew hundreds of millions in Chicago for????

Once again, I heard Obama say the other day, "This bailout plan isn't the start of what we need to do, it's only the beginning."

That, folks, scares the hell outta me.

[Barney Frank]

Barney Frank have you seen the Strata-Sphere video of Obama talking to his ear piece? it's hilarious.

OMG, royf. That is hilarious.
That's more like a deer through the windshield look than deer in the headlights.
He looks so vacant I half expected him to drone 'Klaatu baraka nikto".

[Pofarmer]

When Laffer is scared--I'm very scared.

But glasater, here's the thing. How are the clowns that got us into this mess gonna get us out??? There's only one person on either ticket right now that's balanced a state budget. Only one person that has actual Executive experience on any scale, well, besides Cindy McCain.

[Pofarmer]

Oh, I was looking at one of Rick and GMax links, and they were talking about Interest rate derivative swaps. Anybody know what kicks any of them in?

[Barney Frank]

At the wholesale level things have been insanely inflationary for a couple or three years now.

Po,

That's part of the natural cycle of free markets and bad policy. Same thing happened in 73 and 79. Price inflation reduces demand. The coming year or two is going to see a rollback of those prices as worldwide demand drops off a cliff.

[Pofarmer]

What does happen, though, is that it turns these CDSs into mechanisms for turning billions in cash into worthless paper into a machanism for turning cash into something that does have a market value, even if it's a loss.

Problem is, if the companies don't have the liquidity to excercise the CDS swap, you're still back to square one. There has to be either cash or assets to back up the CDS Swap. From what I understand, not all the CDS are based on a cash swap for the MBS. Some of them could be based on a swap for another asset, and it could be any of a number of things that the parties agreed on that would set them off.

[Pofarmer]

Po,

That's part of the natural cycle of free markets and bad policy. Same thing happened in 73 and 79. Price inflation reduces demand. The coming year or two is going to see a rollback of those prices as worldwide demand drops off a cliff.

Yes Barney, absolutely.

And what is this bailout bill going to do to reduce the decline in housing prices, which is the underlying cause of the problem?

[PeterUK]

"1% Not sure"
That would be TGO.

[Charlie (Colorado)]

At the wholesale level things have been insanely inflationary for a couple or three years now.

that doesn't mean that there haven't been massive deflationary forces in the last month.

And what is this bailout bill going to do to reduce the decline in housing prices, which is the underlying cause of the problem?

Nothing, just like it's not going to do anything about CRA, 527s, media not reporting potentially damaging things about Obama, AIDS, global warming, the lack of sunspots, or the bad wheel on the Mars rover.

[Pofarmer]

that doesn't mean that there haven't been massive deflationary forces in the last month.

True enough. Not seeing it reflected in input prices yet. It is being reflected some in crop prices right now, though.

And what is this bailout bill going to do to reduce the decline in housing prices, which is the underlying cause of the problem?

Nothing,

And, therein lies the rub. The Fed buying a whole bunch of bad MBS debt isn't going to stem the losses in that sector.

[Pofarmer]

The mars rover has a bad wheel??? I hadn't heard about that. Bummer, that's been a pretty spectacular program.

[glasater]

Pofarmer--Congress can't get us out of this mess.

Re:Once again, I heard Obama say the other day, "This bailout plan isn't the start of what we need to do, it's only the beginning."

Cavuto was interviewing one of the CBC members yesterday and he said Zero had called him to change his vote to 'aye'. Zero had told him that he was elected President--Treasury would have some leeway on how the rescue package would be handled--to the CBC member's satisfaction.
The only thing I could infer--and Cavuto--was that Obama would craft a whole different priority set when he is in office without congressional approval.
I am looking for that video conversation to bring back with a link.

[Charlie (Colorado)]

And, therein lies the rub. The Fed buying a whole bunch of bad MBS debt isn't going to stem the losses in that sector.

And it's not going to get people to vaccinate their kids. Or fix the miscreant disk in my lower back. Or tell us who Harry Reid knows who was short insurance last week.

The point being that it's not supposed to stop the losses; it's just supposed to make MBSs liquid so we can find out what they're worth and people can make reasonable risk-reward decisions.

The mars rover has a bad wheel??? I hadn't heard about that. Bummer, that's been a pretty spectacular program.

Well, Spirit has had the bad wheel for two and a half years, so i'ts not exactly game over.

[Charlie (Colorado)]

True enough. Not seeing it reflected in input prices yet. It is being reflected some in crop prices right now, though.

Well, the ones I'm thinking about would have more to do with money supply etc, but think about oil prices. But money has been fleeing banks, money markets, etc and going into other things, so M2/M3 money supply should have dropped dramatically in the last two weeks. That would be deflationary.

[Porchlight]

Pofarmer, all I hear is politics, too. I live in a blue town, though, so I rarely hear anything positive about McCain or Palin.

I think McCain can hammer it home, too, but even if he does, will it make it through the media filter? Or will they just keep covering for Obama and hammer McCain back for "running a negative campaign"? I thought they were bad in 2004 but it's so much worse now.

[glasater]

Have not found that particular link on the CBC member but here is a video from Fox featuring John Ruttledge who is one smart capitalist and he also refers to the Farm Crisis from the '80's.

[matt]

I've decided to incorporate myself as a bank, make up fraudulent loan based derivatives, and then go to the Feds and sell them.....What better expression of the "Rescue" bill that just passed....It's going to be interesting to see what garbage comes over the transom on this one. Pre revolutionary Russian government bonds anyone? South American railroad bonds? Tulip futures?

[Pofarmer]

But money has been fleeing banks, money markets, etc and going into other things, so M2/M3 money supply should have dropped dramatically in the last two weeks. That would be deflationary.

That's true. But, it's taken us from the insanely low rates in 2001 to get to this point. It's hard to think that two weeks is gonna end the world, or change the trend. When you look at the bank reserves, it also seems that alot of that decrease was political.

[Neo]

“The suggestion that Ayers was a political adviser to Obama or someone who shaped his political views is patently false,” said Ben LaBolt, a campaign spokesman.

Can you say "non sequitur" ?

[DebinNC]

Cavuto was interviewing one of the CBC members yesterday

That was Elijah Cummings (D-MD), glasater, and Obama promised to add in the bankruptcy judge stuff that was removed.

[glasater]

The Cavuto video coversation with the CBC critter is not up yet. Am hoping the site is just behind because what the congressman said sure got Neil's attention.

[glasater]

Thanks so much DebinNC. That's exactly what I was looking for!!

[glasater]

Here is the Elijah Cummings link stating:

Another deciding factor for both, they said: Sen. Barack Obama. Cummings said he spoke to the presidential candidate two days ago, Edwards said she received her call yesterday. And while Obama applied no pressure, they said, both said they were reassured by Obama that if he is elected, attention will be paid to their concerns. In particular, both said Obama voiced support for a measure that would allow judges to modify loans of homeowners who have declared bankruptcy.

There was also something to the effect that the next Treasury Sec would have some type of leeway--which I have not found yet.

[bad]

How is the "change in principle for troubled mortgages" promised by Biden at the debate and by Barney Frank on C-Span going to work? I'm asuming taxpayer funds will be used to affect the change. Is the "change in principle" applicable to corporate mortgages or just to individual homeowners?

[Charlie (Colorado)]

But, it's taken us from the insanely low rates in 2001 to get to this point.

Well, so what? If I start with ten cups of flour, take out two, and add back a cup, it's still nine cups of flour, no matter how I got the ten cups to start with or what my motivation for all this flour-moving might be.

[glasater]

Bad--re:"change in principle for troubled mortgages"

From Empty Wheel--

And it sounds so dandy--not.

"these folks have a real chance at homeownership one day"

[Gmax]

Something that did not penetrate the fog of reporting on the rescue bill, at least did not penetrate my fog until just now:

The U.S. Federal Reserve gained a key tactical tool from the $700 billion financial rescue package signed into law on Friday that will help it channel funds into parched credit markets.

Tucked into the 451-page bill is a provision that lets the Fed pay interest on the reserves banks are required to hold at the central bank. The Fed is expected to provide details of the facility next week.

From CNBC. I think this deals with the confidence issues with interbank lending, and allows the FED to set some rates as well. I see this as immediately helpful if Bernanke puts it in place this week.

[RichatUF]

bad-

I'm still scratching my head on that. Someone here called it a "cram down". I haven't looked up anything regarding personal bankruptcy though and I'm going to drink a lot tonight. The previous housing resuce bill included an IRS provision of a 45k tax credit for mortgage forgivness in lue of foreclosure (because mortgage debt forgivness above some level is taxable income?).

The more I read about this debacle, the more I get pissed off. Obama would turn the 700 billion dollar plan into a slush fund to his ACORN and Non-profit foundation buddies so they could bully corporations even more.

Also, I'm trying to look up some information on AIG, Lehman, Fannie, Freddie and maybe you can help. I'm trying to see if the Tides network of foundations and endowments (things like Mott, Ford, Hewitt, OSI etal) collectively had a big enough position in those companies to have participated in the bear runs with killed those companies (leaving aside for a moment they were already the walking dead). Any ideas where I might find a list of non-profit investments in the common or preferred shares of the aforementioned companies?

This crap is starting to smell so bad it can't even be hidden in plain sight anymore. I'd like to know where the IRS, SEC, CFTC, and the Office of Financial Crimes and Intelligence has been. I'm getting tied of a US Government that allows criminal activity to be swept under the rug because it might prove unpopular (or hard) to bring charges or that they'll be accused of "racism" and "politicization". They've allowed a fascist movement to grow up around them and it seems like they'd rather follow the dictates of the Open Society Institute or ACORN (so as to not be accused of racism)than to protect life, liberty, and property of all Americans.

[Charlie (Colorado)]

I'm not thrilled about the "adjust principal" thing, but do recognize that banks have always had the ability to negotiate both the principal and the interest in order to prevent foreclosure.

If the value of a property has fallen a lot, it's to the bank's advantage to negotiate the principal down to a more current value and keep the mortgage performing, instead of paying the costs of a foreclosure and assuming an asset in a bad market.

[glasater]

Rich @ 3:06 PM--may I just say that I echo your sentiments.
Thank you!

[Charlie (Colorado)]

Beware of seeing too many patterns of too subtle kinds.

And if only for old times's sake, don't leave out the Bilderbergers, the Illuminati, and the Freemasons.

[glasater]

Charlie--But what does keeping the the mortgage performing do to the value of the other properties in the vicinity in that environment?

[Gmax]

We are talking giving a bankruptcy judge the unilateral power to reduce your debt and let you keep the house it was bought with. Not some rational decision made by a bank that says, they cant pay more and house aint worth the balance either, so why not see if reset will make this a performing asset.

Difference being that judge decides and that makes nearly every new loan riskier to make.

A very dumb more that will cause the pricing on mortgage to spike upward to reflect this new cost and risk.

I strongly recommend this provision go right back in the trash dumpster where the House Republicans placed it.

[Charlie (Colorado)]

How is the "change in principle for troubled mortgages" promised by Biden at the debate and by Barney Frank on C-Span going to work? I'm asuming taxpayer funds will be used to affect the change.

If it were done in the normal fashion, it would be a writedown of the asset for the bank, and basically a new repayment table on the mortgage. (Maybe that means canceling the old mortgage and writing a new one.)

If they're offering a tax credit, that's where "taxpayer funds" would come in, and it'd be most probably a credit to the bank that counters part of the writedown.

Consumers see this more often with credit cards than mortgages, but this is what "credit counseling agencies" do: negotiate a new balance and new repayment schedule with the credit card company.

[Charlie (Colorado)]

Charlie--But what does keeping the the mortgage performing do to the value of the other properties in the vicinity in that environment?

Probably either nothing, or improves it: foreclosed houses on a block drive other values down.

[Charlie (Colorado)]

We are talking giving a bankruptcy judge the unilateral power to reduce your debt and let you keep the house it was bought with. Not some rational decision made by a bank that says, they cant pay more and house aint worth the balance either, so why not see if reset will make this a performing asset.

Certainly that's what they wanted, but that's not there now. I agree we don't want it to become a standard tool of the bankruptcy judge (although think about what bankruptcy judges can do in states with a "homestead exemption" already.) But the answer is not to let them do it.

[DebinNC]

I hate that commercial with a pleased as punch couple crowing, "I owed the IRS $120,000, but after calling X, I now owe $7000. Rewarding irresponsibility doesn't seem a good way to see less of it.

[bad]

So the lending insitution will be the one to bear the financial loss and will recoup their losses by offloading on paying mortgage holders. Right?

[bad]

Any ideas where I might find a list of non-profit investments in the common or preferred shares of the aforementioned companies?

That's above my paygrade but Rick probably knows.

[Barney Frank]

And what is this bailout bill going to do to reduce the decline in housing prices, which is the underlying cause of the problem?

The bill is not intended to cure the underlying problem but rather the overlying one of a potentially devastating credit crisis which could turn a recession into a depression.
The only things that will cure the decline in real estate is the elimination of oversupply and the associated return of price rationality and an economic upturn.
Government, at best, has limited levers to effect those. It has considerably more levers to unfreeze the top of the financial structure.

[Charlie (Colorado)]

So the lending insitution will be the one to bear the financial loss and will recoup their losses by offloading on paying mortgage holders. Right?

Yeah. Just like it has been in the past. Goes to the bank's stockholders first, then eventually to the people who buy new mortgages, by forcing the rates up.

On the other hand, it doesn't hurt people as much as the foreclosure would, because the bank doesn't loe as much money.

Not saying it's good, just that it's less bad and an old practice, not some kind of new craziness.

[Charlie (Colorado)]

I can't say where I got it because it's not for attribution, but there is a new piece going around making big connections among Obama, ACORN, and vote fraud.

[RichatUF]

Oh damn it Charlie, I've read and linked to the Paranoid Style of American Politics probably a half dozen times here in the comment section-I'm not going to start ranting about the NWO and inventory my ammo and food stocks in my bunker.

The NYT's is a link to a new study, which is probably the same as a bakers dozen of previous studies, saying the same thing: people become superstitious when they feel they don't have a handle on a situation. My previous comment is a worthwhile question, and the article you linked is of a piece of the incurious media not wanting to report on something which would be unfavorable to their political program-"on going" investigations not withstanding (the FBI is "looking into" the collapse of Fannie and Freddie-and surprise, surprise-they probably won't find much, or more specifically, won't report much).

However, I do think that Lehman and AIG were brought down by illegal bear raids, and I think the place to look is Obama supporting foundations, which could have gotten the inside information necessary, by being shareholders, and could then have leased out their stock for short sales.

Free market capitalism depends on trust and the rule of law and if these recent market episodes were made worse by a betrayal of trust and flouting the rule of law those responsible should be held accountable. It is also true that Obama benefits greatly from these market dislocations and if he were elected his allies would stand to benefit greatly from the recent market turmoil and government actions in response.

This is exactly the sort of manipulative behavior and actions which have brought marxist and fascist governments to power in the past. Why would people think that with the generation of the New Left at the height of their political and economic power they wouldn't take one more run at the American people to affect a "progressive revolution" in this country?

[Rick Ballard]

Hedge Hogs Eating Their Own

What a shame.

The original question concerned picking a metric to measure success of the program. I still vote for watching the T rates inter-relationships until the settlements have been made on the CDS auctions. I certainly wouldn't trust any of the players until the extent of their losses in CDS can be ascertained. Those big cash balances could be gone within two weeks.

Once those losses are determined (and as long as there isn't another big BK or credit rating change) the next area of measurement would (IMO) be the commercial paper market. Banks are going to grow tired of .5% annualized returns on short T paper pretty quickly. It's hard to book a profit when you're paying depositors 4% and then collecting .5% from the short Ts. Really, really hard.

[RichatUF]

Rick-

The original question concerned picking a metric to measure success of the program. I still vote for watching the T rates inter-relationships until the settlements have been made on the CDS auctions.

Motion seconded.

Sorry folks, don't know why I started to rant-just woke up in a bad mood today.

[Rick Ballard]

Rich,

I certainly didn't mean to imply that determining which shark bit the first leg off isn't without merit. I don't know how to get to the asset listing for foundations. They typically hire money runners so you would have to figure out the relationship between the foundation and whatever fund (or funds) they use to manage the endowment.

Things got very weird when Lehman refused to do the right thing as they went under. Grabbing that $8.5 billion of UK dough rather than sending it back took the 'faith' right out of the system. Perhaps GS and MS did push them off the cliff. It still couldn't have happened had they not been standing so close to the edge.

We deserve thieves with more honor running our dough.

[M. Simon]

WSJ: Unsecured creditors of Lehman Brothers Holdings Inc. asked a court overseeing the securities firm's bankruptcy proceedings for permission to investigate how Lehman ran out of money.

[Barney Frank]

Here's a good primer on CDSs with this interesting analogy:

Credit default swaps are not unlike me being able to insure your house, not with you, but with someone else entirely not connected to your house, so that if your house is washed away in the next hurricane I get paid its value. I’m speculating on an event. I’m making a bet.

Unfortunately he doesn't follow his point to its logical conclusion (as Rick has several times) that owning insurance on someone else's houses gives one an enormous incentive for arson. Nor does he point out that so far that this type of arson is not prosecuted.

[Charlie (Colorado)]

Takes a couple of deep breaths, Rich. I didn't direct that specifically at you --- there have been a lot of other people pushing conspiracy theories --- and I didn't say what you said was necessarily wrong. I just said "beware."

[RichatUF]

Thanks guys. I'm going to have a few beers with friends and enjoy the rest of the day.

[Charlie (Colorado)]

And yeah, it could have been manipulated, and yeah, I'd even note that George Soros is noted for this kind of thing. But the best method for avoiding the sort of social situation that really could allow for a fascist takeover is to keep the financial system from collapsing and unwind things with as little dislocation as can be managed.

[Charlie (Colorado)]

Believe me I understand, Rich --- I had a couple of rough weeks myself.

[M. Simon]

DebinNC,

The IRS often just makes up numbers. Esp. if you say bad things about them.

[M. Simon]

I can't say where I got it because it's not for attribution, but there is a new piece going around making big connections among Obama, ACORN, and vote fraud.

LUN scroll down.

[Barry]

Uh, that's uh, not the, uh, ACORN I, uh, knew.

[Rick Ballard]

I would encourage readers to bookmark the piece in Barney's link. The article is clearly written in understandable English and covers many of the salient points concerning CDS. Please note the names of the firms which employed the great thieves who designed this dogs breakfast.