[Winstonm]

The New York Times is reporting that the Bank of America has proposed to the U.S. Congress a creation of a special government agency to buy troubled debt, thereby eliminating these obligations from the bank balance sheets and transferring the risk of further loss to the taxpayer - a socialization of bad debt.

From the NYT (emphasis added)

Quote

WASHINGTON — Over the last two decades, few industries have lobbied more ferociously or effectively than banks to get the government out of its business and to obtain freer rein for “financial innovation.”

A confidential proposal that Bank of America circulated to members of Congress this month provides a stunning glimpse of how quickly the industry has reversed its laissez-faire disdain for second-guessing by the government — now that it is in trouble.

The proposal warns that up to $739 billion in mortgages are at “moderate to high risk” of defaulting over the next five years and that millions of families could lose their homes.

To prevent that, Bank of America suggested creating a Federal Homeowner Preservation Corporation that would buy up billions of dollars in troubled mortgages at a deep discount, forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates.

“We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bailout of the bond market,” the financial institution noted.

The arguments against a bailout are powerful. It would mostly benefit banks and Wall Street firms that earned huge fees by packaging trillions of dollars in risky mortgages, often without documenting the incomes of borrowers and often turning a blind eye to clear fraud by borrowers or mortgage brokers.

If the government pays too much for the mortgages or the market declines even more than it has already, Washington — read, taxpayers — could be stuck with hundreds of billions of dollars in defaulted loans.

As is the usual case with the U.S.A., we like to do things in a "super" manner. Not satisfied to bailout a single failing lender like the U.K. (Northern Rock), the ideas being proposed in the U.S. are more "Northern Rock on steroids".

On which side of this fence do you sit? Bail 'em out or let 'em burn?

[1eyedjack]

On a rather smaller scale we in the UK have a parallel in the form of the nationalisation of Northern Rock

[Al_U_Card]

Is there still anyone that doesn't know that the Corporate Bankers run the country, the economy and the world and have done so for centuries?

Wake up fer chrissake's!

[csdenmark]

Not as simple as that Winston. Ordinary people will always be the persons suffering from bank failures. Such have huge implications to whole society - therefore they are mostly saved by the words - too big to fail.

In danish radio some few days ago a Chicago professor was quoted for asking for bank stockholders also to be affected of mis-mangement in bank sector. That is new.

We have just had a bankfailure in Denmark 14 days ago and in Germany they have very hard problems with holding banks for the saving banks. It will be very good for world economy if USA would be able to do something serious about how to handle your own economy. Right now we are all suffering from too much debts by ordinary americans.

From the leftwing site of the political spectre, to which I belong, we have said for many years that it will be a good idea to privatize the private companies.

[helene_t]

I get sick of this homeowner crying.

Subsidize homeowning through tax reductions to make homes available to people with moderate incomes. Yeah right, apply the same principle to kaviar and Royces and everyone would see how absurd it is.

Homeowner's tax rebates justified by them taking a financial risk which renters don't take. As if financial risk was in society's interest.

And when the risk materializes, now we see this proposal of subsidizing even more to neutralize the risk.

I'm all for homeowning, I think it has a lot of advantages over renting, both at the household level and for local community. And of course individual homeowners are not to blame for the government's (both the US and many European ones) sillyness.

But .... this whole problem was created (well, at least made worse) by tax rebates that drove the prices up, requiring enormous mortgages. And now they are proposing to solve it by spending even more government money.

[Winstonm]

Let me clarify this plan somewhat. The idea being proposed by B of A is a government agency that would buy these troubled loans at a discount.

Here is the troubling aspect of this idea: there is virtually no market for the securities, so there is no way to place a mark-to-market value on them. Any "discount" would simply be a guess as to their value.

The end result is that the risk of over-pricing is passed from the loan originators to the taxpayer.

The idea is somehat akin to buying a ticket on the #7 horse for $2, and when the horses turn into the stretch the #7 horse is 20 lengths back in last place - at which point you sell the ticket to the government for $1.00. And then claim the reason is for the good of the horse - that somehow, magically, the government sponsorship of the ticket can transform Mr. Ed into Secretariat.

Nice racket - you get to keep 100% of any gains with only a 50% risk of loss.

[Winstonm]

Quote

I'm all for homeowning,

I am, too. Unfortunately, this is no longer about homeowning - it is about preventing asset deflation. The entire problem with housing is one of affodability, i.e., prices. To revert to mean, prices of U.S. homes need to fall by about 35%.

The sole reason for the desire to keep people in their homes has nothing to do with genuine concern about homeowners - it has everything to do with supporting inflated asset valuations - and bailing out of bad paper before further collateral decline occurs.

If I were the rest of the world, I would be disgusted with the U.S. for allowing itself to get into this predicament.

[csdenmark]

Winston it is certainly correct there is no longer any market for those securities. Once there was a market it was because of international bankmanagers looking to the percentage to win ignoring basic of market economy - the risk.

America has a huge problem - countries like France has same kind of problem. People are low skilled and they need low productivity jobs. From that they are unable to pay for the living standard they think they have a right to have living in a western society.

The industy need to invest in education and innovation to enable a country to differentiate from the real low-cost countries like China and India. For USA you have a systemic problem that all too much of your innovations are spin-off from military industry - which means it is subsidized to a level we cannot imagine in Europe.

You need an economy so that people will be able to live the life they rightfully can expect from their wage. We see your problem partly in Europe too in Italy, France and Germany. All European leaders are in these years studying the scandinavian model - the former alienated social experiment.

[Winstonm]

CS,

Yes, the world labor arbitrage has created a working class in the U.S. that is not yet awake to its plight - it is most likely a generational concept that will take years to change.

From 2000-2007, the U.S. national debt rose from $5.6 trillion to $9.1 trillion - a hyperinflationary amount had the Federal Reserve been required to monetize the full amount - however, foreign central banks monetized about 50% of that, in essence diluting the hyperinflationary effects and distributing those effects around the globe.

The full impact of world labor arbitrage will not be felt until either the U.S. consumer reaches the insolvency point or the world stops subsidizing U.S. debt.

[Al_U_Card]

First off, land should not be "owned" by the individual. A 99 yr lease at fixed rates. No speculation. House prices set by decree. Then you have a known amount to finance. Less risk.

[Winstonm]

Al_U_Card, on Feb 24 2008, 06:34 PM, said:

First off, land should not be "owned" by the individual. A 99 yr lease at fixed rates. No speculation. House prices set by decree. Then you have a known amount to finance. Less risk.

Interesting you say this as about 50% of the increase in home prices was due to land appreciation. But now all those builders who bought land at a premium are dumping those contracts as huge losses. Reversion to the mean is a bitch if you are a bubble.

[Al_U_Card]

What subjugates us fiscally is our dependence on the upcoming rates and values that we cannot control but that those that can know in advance and we pay the difference that they pocket.

Gambling is one thing, sucker's bets are another so that needing and aquiring a home etc. should not be subject to speculation.

[helene_t]

Al_U_Card, on Feb 25 2008, 12:34 AM, said:

House prices set by decree.

omg. Suppose you want to sell a house but nobody want to buy it because the decree price is too high. Or suppose thousands of people are willing to pay an additional million under the table because the decree price is too low.

Or suppose you are working for the decree-setting agency and receive thousands of letters everyday from people with interest in your decisions, all variations of theme "an offer you can't resist".

[Al_U_Card]

Not a problem. There would be "classes" of house. From modest to luxury and various ranges in between. Your modest house range might be 50K to 100K etc. Your value would be what the market and your house condition would represent.

[kenberg]

A. Drop in home prices: In the Md-DC area where I live, housing prices went up very very substantially over a small number of years. Now they are dropping. Someone who bought a house five years ago can still sell his house today for substantially more than he paid for it. People who bought two years ago and now need to sell for some reason or another might well be in trouble. I wouldn't think this would be too many people except for speculators. I am not looking for ways to help speculators if their speculation doesn't turn out right. For the homeowner, maybe. But I need to be convinced. Two years is a very short time for owning a home unless you are speculating, and I really don't see why the five year guy has a problem. Unless he took out a stupid mortgage, Which brings us to

B. Stupid loans: I really don't know what the answer is. I think that a clear cut announcement by the banking industry that they have been inexcusably irresponsible would be a good start. I don't want to bring the whole business down in a heap but there has been gross idiocy out there and I am not keen on rewarding it.

I hope that someone smarter than I am knows what to do here.

[helene_t]

kenberg, on Feb 25 2008, 04:09 AM, said:

Two years is a very short time for owning a home

I suppose most of those who sell a house are doing so to buy another house in an area where prices are dropping as well.

So the people affected are not those who owned a particular house for two years, but those who stayed in the housing market for two years,

Even rarer.

[Al_U_Card]

Really hard to fix stuff that is worse than broken.

Needs a major rethink, but the PTB don't want that. They want to maintain control at the expense of those who are manipulated.

[Winstonm]

The only valid solution is to let the markets work the problems out for themselves, but as this will cause tremendous political pain it will never happen. But why should we bail out the very facilitators of the problem?

If the markets work out the problem and banks fail and new banks are needed, then take the bailout capital and use it to capitalize a new government bank with new rules and new regulations that prevent a recurrence.

The problems faced by the U.S. economy are much more than subprime home loans - it is an insolvency problem caused by personal debt out of balance with incomes. This housing fiasco could just as readily be solved by raising incomes, but no one is calling for a personal debt bailout.

We are an economy based on bubble creation - equity and insurance creation and inflation of the values of those financial products - the wealth created is really only mirage - it disappears when the bubble collapses. The only way to restore the lost wealth is with a new bubble. Dot.com in 2000 $7 trillion in mirage capital evaporated. Eric Janszen at Harper's estimates that the 2007 housing bubble collapse will evaporate $12 trillion in mirage capital before it is through.

The ramifications of this collapse are chilling: losses of tax incomes to states, both from real estate taxes as well as sales taxes. This leads to reductions in government spending, layoffs, downsizing, and all manner of recessionary/deflationary contractions - Vallejo, Calif. has announced the city may have to file for bankruptcy. California is looking at an across-the-board 10% reduction in government spending, and this just since the January budget was announced.

The problems are ominous and growing - why do we want to support the very same system that created the problem?

It is time to pay the piper - bailing wire and duct tape will no longer suffice.

[helene_t]

It is probably too late to solve the problem now, but here is a proposal to prevent it from happening again:

The bonds issued by mortgage banks should be coupled with futures on the housing market in general (or the particular segment on which the bank operates). Mortgage banks distribute the complements of those futures among loantakers.

Thus when prices go up, bond owners, no home owners, gain, and the same when they go down. Home owners can still lose by bad maintenance of their house or by bad work of the estate agent, but not by the market going down.

There are some technical problems with implementing this, but the basic idea is that the market risk should be carried by bond owners, not loantakers. Bond owners are typically retirement funds and Arabic oil states. They operate on long terms, they are professional investors, and they can spread the risk by investing in other things than mortgage bonds.

[Winstonm]

helene_t, on Feb 24 2008, 10:41 PM, said:

kenberg, on Feb 25 2008, 04:09 AM, said:

Two years is a very short time for owning a home

I suppose most of those who sell a house are doing so to buy another house in an area where prices are dropping as well.

So the people affected are not those who owned a particular house for two years, but those who stayed in the housing market for two years,

Even rarer.

The cause is the same in all bubbles - when qualified buyers have been exhausted the bubble moves on to unqualified buyers to sustain its thrust. Except for flippers and speculators, which I believe were only a minor part of the buyers, the rest were simply unqualified.

To maintain the thrust, innovative financial products were created to attract non-qualified borrowers - 100% home loans, no documentation loans, stated income loans - and the appraisers jobs were basically to ensure enough appraised value to justify the loans. I have read that during 2005 and 2006, 25% of all home loans were of this variety.

The losses of value will of course by assymetrical - areas that had the most ficticious appreciation will have the most loss, like California, Nevada, Colorado, Florida, and Arizona - while some areas may remain relatively stable. But those stable area would be those that had the least price appriciation or had price appreciation caused by qualified supply and demand.

But this mess is so much more than subprime housing - the same securitization process and risk-taking has occured in auto loans, credit-cards, commercial real estate, and even into corporate bonds and corporate buyouts.

Most look around and read the headlines and worry about inflation - but the real risk in the U.S. is a Japan-like recessionary deflation as mirage capital disappears at the same time capital requests are rising - this will put demand pressure on long bonds that will cause higher yields being paid, the very opposite of what is needed to help the housing crisis.

Well, at least we live in interesting times.