patrick.net

It is fine to bailout the banks.

We had exactly this discussion at tea this morning. The majority opinion, which included a Chinese fund money manager, a regional transportation manager, and a French journalist (diversity of background), was that it will be another S&L bailout.

I am the perpetual optimist, and would like to think that people will be held responsible for their actions, and am thinking (wishing??) that there will be repercussions for those who bought things beyond their means and the greedy folk who lent to them knowing there would be no hope of repayment. I am thinking repercussions such as losing the house and jail time or major fines for fraud (depending upon the extent by the individual).

Just what the hell can you do now?

Become a subject of the Grimaldis? Try San Miguel Allende?

Bruce,

Argentina is nice, the currency exchange is good, food is good.

Yah, there will probably be a bailout of the banks. I don't know if there is a 'right' way to do it, but I hope that however it works out, the executives of the failing institutions get held accountable in some way.

For instance, for subprime lenders, I'd like major stakeholders with influence on operations to be held personally responisible from any moneys they have recieved from stock sales. Never going to happen, but it just bugs me that a##wipes sat there selling off their stock for millions of dollars while saying "All is well!" until their companies tanked this year. They purposefully used a bad business plan to make massive short term profits at the expense of long term viability of the company, and they knew it. That smacks of stock manipulation on a grand scale.

After having visited much of eastern Oregon over the weekend (and actually seeing some SUN!) I'm feeling much more positive these days! So positive in fact that I'll go so far as to say a bail-out isn't going to happen. At least not on a scale FB's and FL's (lenders) desperately need to see.

The only thing I can possibly see actually working is to create programs where FB's on the verge of default are allowed to do some kind of "exchange of collateral" where their neg. equity is rolled over to a loan they CAN afford (just w/an extra 10 years or so tacked on).

Of course none of this can take place without a reduction in FICO score so lenders may be able re-coup some of their losses through higher int. from FB's other forms of credito (auto loans, plastic etc.)

As per the FDIC spokesperson (thus far) the SPMD (Sub Prime MeltDown) has been "an earnings event" NOT a regulatory event! It's just hard for me to imagine any kind of a "quick turnaround" for RE b/c they have a solid percentage of their potential buyers addicted to "Zero Down" howmuchamonth financing platforms and coming away from their closing w/ZIP and/or a short sale who will have the down payment to re-ignite sales on the other end?

While I want to believe that people most responsible for this mess (Fed, banksters, Casey Serins, etc.) will be held responsible, I am under no illusions about how our system currently works.

If the MBS/CMO crash in subprime & Alt-A extends to supposedly "safe" AA/AAA tranches (including GSE-issued paper), you can bet your depreciating dollars there will be a Fed/Congressional bailout a-la LTCM/S&L. While they may allow small-fry lenders to go tango uniform, there is no way the federal government will allow the banking system or its sacred-cow GSEs to fail.

The government does not "care" about individual FBs per se; however, if there are enough of them screaming for help, so not underestimate the power of pissed off constituents to bring political pressure to bear. Everything counts in large amounts, right?

Of course, for any massive bailouts to occur, Fed/Congress must figure out a way to finance it. Instituting an obvious penalty on responsible people, such as a renters' or savers' tax, would be as politically unpopular as letting FBs and big banks go belly up. So, my guess is, they will try to go the "stealth tax" route and just monetize the GSEs & banks' bad debt, and strong-arm lenders into generous "work-out" solutions for FBs (converting costly option-ARMs into very low-rate FRMs). This would be by far the easiest and most politically palatable solution.

Exactly how this will play out on the general economy is debatable, but I would expect significant non-housing inflation for the foreseeable future. Whether or not any of this new liquidity will spill over into working-class wages is anyone's guess, but never underestimate the power of the federal printing press, or the desperation of politicians facing angry voters.

Seriously, I think the S&L bailout was viewed as just barely acceptable to the public only because the FDIC, after unconscionable delays, restored monies to the affected depositors - people who were in no sense responsible or contributors to the problem.

The present case touches on so many entities, I think it's not likely that any bailout could be either effective or timely. There are sharper minds than mine, I know, looking at what is possible. I can't help thinking of two examples which color my opinion: New Orleans and the Gulf Coast are of necessity repairing themselves. And Barings Bank is gone.

Just curious--would a bank bailout inevitably weaken the dollar further?
And, how what message would that give to those offshore holders of US Treasuries?

Nate,

Well it certainly "shouldn't" be tolerated! One of the evils I can see playing out is for congress to authorize some sort of "Negative Equity to Original Cost Basis Depreciation Acceleration Clause". This would allow FB's that haven't even sold (thus no taxable event) to actually write off their "loss" to the tune of 12-15-30K a year vice the old 3K.

This to me is unbelievable to even consider! Since we've basically turned the "primary residence" into a preferred/tax deferred/tax free investment w/ZIP cap gains how can we now turn around and say you can write off HUGE chunks of neg. equity (that never REALLY existed to begin with?)

HARM ... thanks for the nice graphics. It was added within minutes of putting up the post. Were you expecting this topic to come up eventually and had it ready ? ;-)

@StuckInBA,

Thanks, glad you liked it! I didn't have it ready, just Googled "government help" and that image was on the first page of results.

"you can bet your depreciating dollars" LOL!

Yeah, uh, that about sums it up now doesn't it! :)

You have to wonder out loud w/as many FB's as there are going to be out there if the Feds allow them to "re-nogotiate" their new (and much lower cost basis) will local gub'ments have a hissy fit based on lower future tax revenue? NFW this can end pretty.

I agree with HARM on this point. I think it's reasonable to expect that the GSE's will be offered a bailout. This way the hedge funds, big wall street firms etc can sell the MBS back to the Fannies and Freddies. The bailout might also be offered to banks who hold the loan.

For the average Joe, tough luck. If you bought a house you are screwed. If you didn't, you are screwed as well due to depreciated USD.

OT, but the Mortgage Lender Implode-O-Meter just hit 36. Back in December (when it first started), you saw maybe 1 or 2 lenders go TU in a given week. We're now seeing 3-4 per week, so the trend is definitely our friend --and accelerating.

StuckInBA,

I see your point. Wouldn't that scenario imply capital flight?

I'm beginning to get the impression that we are all the idiots here. These FBs who've been borrowing and spending like there's no tomorrow will be let off easy, and those who chose to actually exercise financial restraint, save money, and be honest with loan borrowing are going to be left in the same position as we were before. We will be holding onto cash and renting, while your typical FB will have at least enjoyed "owning" a home for a few years before reality sets in, their loans reset, and they get foreclosed on. Meanwhile, unscrupulous lenders and the lemming-like investors who jumped on the MBS bandwagon will get the big fat government bailout.

I guess that's the Amerikan way!