How come no one is asking where the money went?

[King Coal]

That money went somewhere. When the loans were made, someone got paid. When a home sells, 6% goes to the realtors, but the seller gets paid. Where is that money?

I heard that $600 billion of the money is in loans that will be paid. If this is true, why do they need more than $100 billion to for the bailout?

The sickening thing is that in the economics crap game, socialism is a hard-way number. We have a choice of socialism, regulated capitalism, or unregulated capitalism. Now, after many years of unregulated capitalism, all of a sudden, when the chips are down, and the smart play is on the don’ts, socialism is the way to go. Tell me it’s not a rigged game. Who has the chips?

[Gramps911]

1. Eyes wide open

[dipsydoodle]

2. It exists as

projected income streams - on paper only.

[HamdenRice]

3. Important question: You need to wrap your mind around the answer: NOWHERE

Here's a simple model. Let's say Microsoft is worth $100 billion in August. There are 1 billion shares outstanding and each share sells for $100

If you multiply the price of its shares ($100) by the number of shares that the shareholders own (1 billion), the answer is $100 billion.

Now imagine a rumor starts that the Chinese government is about to release a super duper operating system. There are reports that say geeks have looked at it and Windows is dead in the water.

Investors panic, dumping Microsoft shares by the hundreds of millions, and the price of Microsoft shares plummets to $2 per share.

Now the value of Microsoft is $2 times 1 billion shares = $2 billion.

$98 billion in Microsoft's value has "disappeared."

If the next day, the Wall St Journal reports that the Chinese story was a rumor, and there is no Chinese operating system, and everyone rushes out and buys Microsoft stock and the share rebounds to $100 per share that $98 billion magically reappears.

There is an underlying problem in the mortgage market causing the price of mortgage backed securities to fall. But a very large part of the disappearance in value is based on fear.

That's why bailouts often work. The government simply saying "we're going to do something" causes value to reappear -- just like the Wall St Journal article about the nonexistence of a Chinese super operating system.

[sinkingfeeling]

4. Nice example. Thanks.

[King Coal]

5. When you or I buy stock, we pay money for it. Cash.

When we sell it, we receive cash. If we buy the Microsoft stock for $100 a share, and panic and sell it for, say $20 (if we get out as quick as we can), we lose $80 a share. Cash. When the guy who buys our stock at $20, sells it on the way back up at say $80, he makes $60 a share. Cash.

Why are securities different?

[HamdenRice]

7. They aren't, and you're right

That value that disappeared was experienced as a loss by one set of trader and if the rumor is false, will be experience as a gain by another set of traders.

The same is true with mbs. The panicked sellers are the banks. That's why the government stands to make hundreds of billions. They have the liquidity to buy low during this panic AND the unmatchable market and legal power to eliminate the fear and prevent the continued foreclosure wave in the housing market.

It's as though in my example, the same guy who buys all the shares at $2 also is the one who can stop the rumor about the Chinese software. (Only the feds could get away with it because otherwise it would be considered insider trading.)

If the feds do this, they can rig the game to win -- if they want to win. If it's the repugs, they will rig the game to lose, so that the private sector gets the value through quick "privatization" which is what McCain is calling for.

[HamdenRice]

11. One more important fact about cash transactions vs mbs

I think this may also be confusing everyone. Because the banks can't sell the mbs, they don't, like the Microsoft stockholders in my story, sell and lose the $98.

Instead, they are forced to look at their books, at their assets and liabilities and "realize" (in accouting terms) a loss.

So the equivalent would be in the Microsoft story that most people do not in fact sell their shares, but maybe a dozen do. Those trades are posted on the NY stock exchange showing MS stock is selling at $2.

If I own, say 100 shares, I used to calculate my wealth as 100 x $100 = $10,000.

Just because the ticker says MS stock is $2, I now calculate my net worth as 100 x $2 = $200.

I've lost $9,800 "on paper."

If for example I pledged my MS shares as collateral for a loan to purchase a sailboat, the sailboat dealer will also see what MS stock is selling for and call me up and tell me I better bring $9,800 PRONTO or they will repossess my boat.

That's what's happening to the banks.

[King Coal]

15. Bingo. The light went on. Thanks again, Hamden.

[MrCoffee]

6. What happened to all the money Treasury poured into the MBS market this summer?

That's where I get lost. Treasury dumped all that money into the mortgage-backed securities market in the summer, and it didn't work.

Why is it going to be different this time?

[HamdenRice]

8. Treasury loaned money to companies taking mbs as collateral

It wasn't enough to turn the market around and create a market in mbs, but supposedly the collateral was valued to market, which means the govt already has a portfolio of mbs, but as collateral, not as an investment portfolio.

The money was used by banks to pay their debts to other banks presumably.

[King Coal]

9. Thank a bunch, Hamden. I appreciate your time and trouble.

[MrCoffee]

13. Much obliged, HamdenRice

I knew I was missing something about the previous bailout.

[pnutbutr]

10. usually people buy a new house

after they sell one. That's where some of the money went. Even more went into the hands of developers.

[rucky]

12. Same way you lose money in the stock market

It just loses its value. The servicers are still making interest, but that's over a 30-year period - which won't give them the liquidity to back more loans, unless they "cash out" in the bond market.

If I'm not mistaken (and I don't support this), the $700B will back credit lines to the investment banks, so they can continue to "lend" money they borrow, re-package the loan portfolios, and sell them back on the bond market. The only thing is that it won't make the "bad loans" go away, but will keep all the junk in one place, so they're not devaluating packages of loans that are mostly sound, but have a few subprime/Alt-A's in them to poison the whole batch.

[Kurt_and_Hunter]

14. You are thinking of money as an object

A company buys another company for $10 Billion, paying with stock. Then that stock drops to $1 Billion. Most of the missing $9 Billion simply disappeared without anyone getting any money.

Money is created every day. Money vanishes everyday.

Where did the money from the internet bubble go? Most of it simply vanished.