In spite of my comments, I too respect TP's positions and comments even if I don't always agree with him. He generally does much more homework than the rest of us and is consistent with his thoughts. But I think he's missed the point in this case (I hope I'm wrong for all our sakes) and that's what I'm speaking to. Flatlander and Peter p are on the right track. The issue here is not if some guy stretched on a mortgage and gets to stay in the house at the expense of the tax payers. I doubt this will happen very often, even with new legislation (and particularly this current legislation.) The issue is whether the banks and subsequently, business in general has enough cash to operate. Banks do not keep a hoard of cash in the vault, waiting for you to come by and get some. They stay fully invested and leverage that even further. Much of their daily cash needs are covered at the end of the day as all of them enter the repo and brokered CD market, etc. about 4:00 to cover their book for the day. They have repo lines set up with counterparties (other banks or broker/dealers - which we used to have until they went broke last week) where they ask for cash (say $500 million today, even for a relatively small bank) and they offer collateral of somewhere between 104-110% or whatever is agreed upon to the counterparty for the privilege of borrowing the $500 million. Between banks there is a contract “add on” that specify all of the details of that, including what is acceptable collateral and when you have to provide it. Banks with better credit ratings may not have to provide collateral to back their borrowing until set amount. Most of the NY and foreign banks would demand that they not post collateral until a fairly large number - could be $25 - 50 million. Smaller banks or banks with lower tier 1 capital positions (which usually resulted in lower rating agency ratings) may or may not have any unsecured borrowing available to them.
So when the markets began to freeze up, collateral values were dropping and banks were either having to post more collateral which they may not have had or they had to break the repo. At the same time, banks that had received unsecured ("uncollateralized") allowances in the past, were now being required to post 100+ % collateral, which they may not have had. This froze things big time. That's why the Fed said they would accept collateral that they normally would not have taken at the discount window and why they allowed broker/dealers access when they had not in the past - just to get money moving again. It worked for a little while, but it could not get the markets back into equilibrium (read that as trusting one another) and the bailout/rescue plan becomes the alternative.
So, why does the government want to buy these potentially crappy assets? I think it is to establish "trust" again in the market place. Trust doesn't mean would you let that bank date your sister (
) it means that you believe they can do what they say they can and that what they say their true net worth is, is, well, true or “transparent”. Without resolving that, banks don't want to lend to one another and that freezes things up. Will that affect "Main Street"? You bet it will. Good credit, bad credit, no credit (which I also advocate by the way) will be affected because the general economy will go in the tank, unemployment will shoot up, and you can guess the rest.
We haven’t gotten there quite yet, and I hope I’ve got this all wrong and things are just fine, but if this happens, the theory of “just let them eat cake” will be one that could significantly affect all of the US and not just a slack homeowner. I don’t like the “medicine” any more than you do, but I’m not smart enough to figure another way around it and I'm not willing to bet the ranch. I do think it is the federal government’s job to protect the US in the face of such a significant potential negative outcome, even if a few folks don’t “get what they deserve”.
BTW, I can’t stand Nancy Pelosi either and as I said before, she screwed up bad! I don’t know why TP felt I was supporting her. I again, I am not a liberal, except in comparison to TP. But having said that, Attila the Hun is a liberal…
My point is that it doesn't’t matter who in Washington is responsible for the screw up’s at this point – there is plenty of blame to go around if you want to focus on that, which those idiots in Congress seem fixed upon, but we need real leaders to solve the problem and worry about that later. The dissenting Republicans picking their toys up and going home is just as bad as Pelosi’s ranting in my opinion. How any of them can claim moral justification for their actions is beyond me. They are politicians after all.
Sorry for the long post, and I only touched on the complexity of the situation and there is much that I do not understand, but I figured 35 years of messing with that stuff gives me some insight that might be helpful to the rest of you. I just hope I’m wrong!
Peace.
TB
PS If the fix on Mark to Market, as is being thrown around by the dissenting Republicans becomes an issue, I’ll wade in again, but for now, you’ve heard way to much from me and I will shut up and go fishing.
