Regarding “cash for trash”, the question is whether the securities in question are mortgage-backed securities backed by real pools of mortgages (i.e., there are some real assets that can be foreclosed and repossessed to pay back at least part of their face value), or are derivatives of derivatives of derivatives that have no assets backing them, that in essence are just bets about whether housing prices will rise or fall (well, the bets about falling prices have already been cashed in, so huh). If we’re talking “cash for trash” as in buying $500K mortgages on $250K homes, eventually there will be recapture of at least part of that cash, when the home is sold either via foreclosure or when the mortgage cashed out as part of transferring it to the new buyer. My read of the Treasury plan is that rather than have the banks write down these mortgages to market and then re-valuing the pools (and thus the “real” underlying value of the mortgage-backed securities backed by the pools) according to the market value rather than face value of the mortgages, they’re going to basically take them off the market entirely and hope that solves the problem as the mortgages slowly dribble away to foreclosure or sale. The hope is that once the “bad” mortgage pools are off the market, investors will not be so loathe to invest in new “good” mortgage pools, thus freeing up money for loans.
Which of course still leaves all these derivative bets flying around on balance sheets. They should be immediately made illegal by Congress, the loss taken when written down to $0, and then we get to move on with all that mess done with once and for all. And then there’s the problem that banks currently have no shortage of money to lend. They’re just not lending because they view the future value of the money, if they wait to lend it, as greater than the present value of the money. So I’m unclear how this will solve any real problem. It’ll make some accounting books look neater, but that seems to be it, as far as I can tell.
– Badtux the Economics Penguin
Badtux´s last blog post..Ah yes, the nuttiness continues…
]]>When the goal of a business is to maximize shareholder profits, rather than the continuing existence of the enterprise, the enterprise dies.
]]>I have no confidence in any investment right now. I’m using this little bear market rally this week to get money out of stocks while I can still make a profit on a few of them.
LadyMin´s last blog post..Project Budburst
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