Apparently the fate of the entire world economy rests on some % of bad US home mortgages.

[Hannah Bell]

Forgive me if I find this hard to believe.

What's the answer to these questions:

1. How many outstanding mortgage loans are out?

2. Of these, what % in default?

3. For how much?


It might be instructive to compare who the prime movers were in getting rid of Glass-Steagall, then look at which finance houses seem poised to scoop up the failed ones...

http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/demise.html

[Hannah Bell]

1. Hey, if you're going to rec, kick it too!

[Hannah Bell]

2. am kick

[Cessna Invesco Palin]

3. The fate of the entire world economy rests on...

...securities backed by mortgages (some % of which are bad) and the insane market in credit default swaps for mortgage backed securities, which is something like a squillion times the value of the bad mortgages themselves.

[Supersedeas]

5. so now that investments become a venture stake in willingness of middle class to remain silent

[avaistheone1]

37. Only 3% of mortgages are bad

The rest is derivatives and credit swaps and other foolish things even Paulson doesn't understand.

[lostnfound]

53. But Mr. Risk -- Paulsen -- DOES understand them.

He didn't collect $700 M in compensation in 7 years at Goldman Sachs for nothing.

[elehhhhna]

54. derivatives and credit swaps...hmmm. Sounds like ENRON, again.

[debbierlus]

4. Good point

[K Gardner]

6. Someone answered those questions this morning on one of the news shows.. I

am so sorry I was only half paying attention, but I do remember the % was a surprisingly small number.

[Hannah Bell]

7. smaller than 700 billion?

[HamdenRice]

8. Some answers

The number is shockingly small. The NY Times did a breakdown of a Bear Stearns mortgage backed security (mbs). About 1.3% had gone through default/foreclosure. About 23% were in trouble -- but this was the worst of the worst dogshit mbs created. Most are in much better shape.

But if you put 1.3% failing mbs into a pool of hundreds of millions worth of mortgages to create a series of mbs, you can cause the entire series to default.

Moreover, since banks don't know which series of mbs are/will be in default, they won't buy or sell or accept as collateral any mbs -- even the good, performing stuff. As former Treasury secretary Paul O'Neil said, if you knew 1 in 10 bottles of water was poison, would you drink any of them?

So a very small number of mortgage foreclosures first destroys a series and the default of that series destroys confidence in the whole sector. So yes a comparatively small number of foreclosures has caused the entire system to collapse.

The amount of all outstanding mortgages is staggering. It's basically equal to the value of all homes in the entire US, minus the relatively few that are paid off free and clear.

That number is the only number big enough to provide investment opportunity for the $70 trillion in world wide savings looking for someone to lend money to.

[Hannah Bell]

9. do you have a link for the numbers, hamden?

so my next question would be: rather than give a check to the robbers, could the gov buy up the last 8 years of mortgages, rewrite the solvent ones, resell the failed ones, & come out better?

Though i suspect the real reasons for this bailout aren't quite as advertised, so such a course would never be considered...

[johnaries]

13. Here's part of the problem - no one knows which ones are which.

The mortgages have been "bundled" together into security packages containing both good and bad. You would have to inspect each package and discern which are "good" and which is "bad" - which is a impossible task itself unless you have a crystal ball. Then you have to add them together to find the net worth of the package.

But, because no one knows the actual worth of these packages, they are now more or less considered "all bad".

That's an over-simplification, but it's close to my understanding. And I am not an economist, I just listen to NPR and use "The Google".

[HamdenRice]

15. "a impossible task itself unless you have a crystal ball" -- that's wrong

I don't know where this false meme comes from, but the mortgage backed securities issuers have exact data about which loans are performing and which aren't down to the individual loan. Much of this is available online.

But it's true that they are now all considered bad, because no one can predict which ones will contain loans that go into default.

In other words, there is a lot of fear and uncertainty, which is exactly the kind of crisis the govt can step into to calm the markets.

[johnaries]

19. Thanks for the correction. Part of that perception comes

from folks talking about how "mathemeticians and even physicists" were called in to help structure these securities. But it appears we still agree on the outcomes.

[girl gone mad]

56. Not exactly.

Many of the traunches can't be valued going forward because no one is certain of the accuracy of the models on which they are based.

Some of these securities are quite a bit more complex that you assert.

[Hannah Bell]

18. doesn't matter, buy up the last 10 years, refinance the good ones & sell the bad ones.

then regulate & prosecute.

[HamdenRice]

17. I think it's been considered, but it's not on the table now

The contractual requirements are complicated. It's difficult, but not impossible, to get the bad mortgages out of the pool. The easiest way is to buy the entire series, but it's hard to ensure that every holder would sell. So they've decided on a buy and hold strategy.

Here's an article about one series of mbs. In particular check out the spread sheet that allows you to click on to examine in detail a larger version. Please keep in mind that this series by Bear Stearns is the worst of the worst. Yet, if it is being sold for $.25 on the dollar, it's probably a money maker in the long term:

http://www.nytimes.com/2008/09/25/business/25value.html?hp

Also, take a look at this thread:

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=4044397&mesg_id=4044534

[Hannah Bell]

22. if they wouldn't sell, that's their lookout. my concern is that taxpayers

are going to get stuck paying off a lot of junk at inflated prices, for years - scammed again, giving the $ direct to folks like paulson. i'd just as soon pay off the mortgages, let the fraudsters take the money they contracted for, & be done with it - not keep this farce going by letting paulson & his ilk manage things long-term.

[johnaries]

26. That's why this bill included provisions that in addition to the "bad"

assests the US buys we also get some stock. If we can't turn the bad assests, we still get at least part of our money back when the company's stock goes back up.

In fact, there is a potential that we could actually make a profit from this deal.

[Hannah Bell]

27. have you read the 110 pages or are you doing soundbites?

because when i started looking into it, i found the soundbites were lies.

[johnaries]

30. Examples, please. nt

[Hannah Bell]

36. the soundbites from our leaders, e.g. no golden parachutes.

[johnaries]

42. First of all, my post was about receiving stocks, not about

golden parachutes. Secondly, there is a provision specifically banning golden parachutes on pg 31:

(C)a prohibition on the financial institu-10
tion making any golden parachute payment to 11
its senior executive officer during the period 12
that the Secretary holds an equity or debt posi-13
tion in the financial institution.14

You haven't read it, have you?

[Hannah Bell]

43. yes, i've read it. have you? it doesn't ban golden parachutes. the language is written

as it is for a reason.

[johnaries]

44. As a matter of fact, I have it pulled up right now.

please tell me how the language lets them keep the golden parachutes that it specifically bans?

[Hannah Bell]

46. for whom & during what time frame, that's how.

[johnaries]

47. For the Top 5 Executives and during the time that the Secretary

holds the assests.

That means NO GOLDEN PARACHUTES for any of the TOP 5 EXECUTIVES for the entire time that we hold the assests. Here, read the fucking thing for yourself. It's "language" is very clear:

(2)CRITERIA.—The standards required under 20
this subsection shall include —21
(A)limits on compensation that exclude in-22
centives for senior executive officers of a finan-23
cial institution to take unnecessary and exces-24
sive risks that threaten the value of the finan-25
cial institution during the period that the Sec-1
retary holds an equity or debt position in the fi-2
nancial institution;3
(B)a provision for the recovery by the fi-4
nancial institution of any bonus or incentive 5
compensation paid to a senior executive officer 6
based on statements of earnings,gains,or other 7
criteria that are later proven to be materially 8
inaccurate;and 9
(C)a prohibition on the financial institu-10
tion making any golden parachute payment to 11
its senior executive officer during the period 12
that the Secretary holds an equity or debt posi-13
tion in the financial institution.14
(3)DEFINITION.—For purposes of this section,15
the term ‘‘senior executive officer ’’ means an indi--16
vidual who is one of the top 5 highly paid executives 17
of a public company,whose compensation is required 18
to be disclosed pursuant to the Securities Exchange 19
Act of 1934,and any regulations issued thereunder,20
and non-public company counterparts.21

[Hannah Bell]

51. i read it. it mandates:

1. "appropriate" compensation - which = within the ballpark peers get = a lot.

2. no exec compensation which encourages "excessive" risk during the time the assets are being held.

which, depending on how you parse "excessive" is also meaningless, & applies only to the time assets are held. before or after, fine, so there's nothing to prevent the guy who drove the corp into bankruptcy making a killing.


3. recovery of bonuses or incentives paid on falsified info. fine, but even if there's fraud they get their salary = a lot.

4. no golden parachute payment to the 5 top guys during the time assets are held. Lower guys fine, before or after, fine.


So the fuck-ups still take their usual salaries, incentives, bonuses so long as they're not based on fraud, & can begin receiving their golden parachute payments before & continue receiving them when the corp comes out of receivership.

wow, what punishment.

[Hannah Bell]

52. then there's this:

c) AUCTION PURCHASES.—Where the Secretary determines that the purposes of this Act are best met through auction purchases of troubled assets, and only where such purchases per financial institution, in the aggregate exceed $300,000,000 (including direct purchases), the Secretary shall prohibit, for such financial institution, any new employment contract with a senior executive officer that provides a golden parachute in the event of an involuntary termination, bankruptcy filing, insolvency, or receivership. The Secretary shall issue guidance to carry out this paragraph not later than 2 months after the date of enactment of this Act, and such guidance shall be effective upon issuance.<<


if assets are to be purchased, no NEW golden parachutes (old one honored).


(d) SUNSET.—The provisions of subsection (c) shall apply only to arrangements entered into during the period during which the authorities under section 101(a) are in effect, as determined under section 120.

New golden parachutes can be granted post-reorganization.


In fact, there's a million ways around it all.

[johnaries]

62. Again, it only applies to companies that are being aided

while they are being aided. The government cannot legally tell them to default on previous contracts, so if an exec already has a golden parachute contract we can't force them not to honor it. After we no longer have to aid them, we don't care what kind of exec contract they make because we are no longer aiding them.

There are NOT a million ways around it. It's cut-and-dried.

[Hannah Bell]

63. nice spin. but nothing affects existing contracts, nothing affects compensation

levels, perks, incentives, bonuses - just that they not be "excessive" (legal weasel word) or based on fraud. exec compensation can still be structured to pay execs & former execs whatever they want - nothing prevents it in this bill.

people's concern is that those responsible for the mess shouldn't profit from it if we're going to bail them out.

but, they're going to profit from it - & take more of our money, too.

the blather about credit tightening is blather: credit is tightening because the owners of capital want to tighten it, giving them more money won't loosen it. The problem isn't lack of money in the system - the system is rolling in money.

Wrong solution.

[johnaries]

60. I HOPE you read it, since I had to post it for you in another thread.

WE don't care if they get a golden parachute if they aren't being helped, which is what the bill says. And although we would all like to see them "punished", this is not about punishment but about keeping them from taking advantage of the aid. And how often are golden parachutes offered to execs below the top 5?

[girl gone mad]

57. The fact that it only applies to the top 5..

needs to be changed.

Equity stake is not guaranteed in TARP, btw.

[johnaries]

59. I think that is a minor point, considering it's usually the top 5 who

get the bonuses and parachutes.

[johnaries]

31. OK, tell me which part of this is the "lie"

(1)IN GENERAL.—The Secretary may not pur-24
chase,or make any commitment to purchase,any 25troubled asset under the authority of this Act,unless 1
the Secretary receives from the financial institution 2
from which such assets are to be purchased —3
(A)in the case of a financial institution,4
the securities of which are traded on a national 5
securities exchange,a warrant giving the right 6
to the Secretary to receive nonvoting common 7
stock or preferred stock in such financial insti-8
tution,or voting stock with respect to which,9
the Secretary agrees not to exercise voting 10
power,as the Secretary determines appropriate;11
or 12
(B)in the case of any financial institution 13
other than one described in subparagraph (A),14
a warrant for common or preferred stock,or a 15
senior debt instrument from such financial in-16
stitution,as described in paragraph (2)(C).17
(2)TERMS AND CONDITIONS.—The terms and 18
conditions of any warrant or senior debt instrument 19
required under paragraph (1)shall meet the fol-20
lowing requirements:21
(A)PURPOSES.—Such terms and condi-22
tions shall,at a minimum,be designed —23
(i)to provide for reasonable participa-24taxpayers,in equity appreciation in the 1
case of a warrant or other equity security,2
or a reasonable interest rate premium,in 3
the case of a debt instrument;and 4
(ii)to provide additional protection 5
for the taxpayer against losses from sale of 6
assets by the Secretary under this Act and 7
the administrative expenses of the TARP.8
(B)AUTHORITY TO SELL,EXERCISE,OR 9
SURRENDER.—The Secretary may sell,exercise,10
or surrender a warrant or any senior debt in-11
strument received under this subsection,based 12
on the conditions established under subpara-13
graph (A).14
(C)CONVERSION.—The warrant shall pro-15
vide that if,after the warrant is received by the 16
Secretary under this subsection,the financial 17
institution that issued the warrant is no longer 18
listed or traded on a national securities ex-19
change or securities association,as described in 20
paragraph (1)(A),such warrants shall convert 21
to senior debt,or contain appropriate protec-22
tions for the Secretary to ensure that the 23value of the warrant,in an amount determined 1
by the Secretary.2
(D)PROTECTIONS.—Any warrant rep-3
resenting securities to be received by the Sec-4
retary under this subsection shall contain anti-5
dilution provisions of the type employed in cap-6
ital market transactions,as determined by the 7
Secretary.Such provisions shall protect the 8
value of the securities from market transactions 9
such as stock splits,stock distributions,divi-10
dends,and other distributions,mergers,and 11
other forms of reorganization or recapitaliza-12
tion.13
(E)EXERCISE PRICE.—The exercise price 14
for any warrant issued pursuant to this sub-15
section shall be set by the Secretary,in the in-16
terest of the taxpayers.17
(F)SUFFICIENCY.—The financial institu-18
tion shall guarantee to the Secretary that it has 19
authorized shares of nonvoting stock available 20
to fulfill its obligations under this subsection.21
Should the financial institution not have suffi-22
cient authorized shares,including preferred 23
shares that may carry dividend rights equal to 24
a multiple number of common shares,the Sec-25
retary may,to the extent necessary,accept a 1
senior debt note in an amount,and on such 2
terms as will compensate the Secretary with 3
equivalent value,in the event that a sufficient 4
shareholder vote to authorize the necessary ad-5
ditional shares cannot be obtained.6
(3)EXCEPTIONS.—7
(A)DE MINIMIS.—The Secretary shall es-8
tablish de minimis exceptions to the require-9
ments of this subsection,based on the size of 10
the cumulative transactions of troubled assets 11
purchased from any one financial institution for 12
the duration of the program,at not more than 13
$100,000,000.14
(B)OTHER EXCEPTIONS.—The Secretary 15
shall establish an exception to the requirements 16
of this subsection and appropriate alternative 17
requirements for any participating financial in-18
stitution that is legally prohibited from issuing 19
securities and debt instruments,so as not to 20
allow circumvention of the requirements of this 21
section.22

http://www.rules.house.gov/110/text/110_hr3997_amnd_samnd.pdf

So, tell me, which part of this makes my statement a lie?

[girl gone mad]

58. It sounds nice, but..

the language shreds all accountability in the name of "long term benefits." Just like we claim we’ll have a "balanced budget" 10 years hence – and never do.

[johnaries]

61. That is a battle for another day. This is an emergency bill.

The Dems wanted to add more accountability, but knew the Reps would never vote for it. We do need to pass many reforms, but those can wait until Obama is Pres. This can't wait.

[Roland99]

11. They shot themselves with their intricate and unregulated investment vehicles.

[gopbuster]

16. Yep..it's the other "troubled assets" as well. n/t

[Hannah Bell]

24. no, they shot YOU in the foot - ON PURPOSE.

[Roland99]

33. I'm rather lucky. I'm quite insulated from the effects...so far.

[johnaries]

14. Right, It's like dominoes.

You can have a million dominoes, but you only have to knock over the right one to knock them all down.

[Hannah Bell]

20. if the dominoes begin with bad mortgages, buy the mortgages, don't

give a check to the gamesters.

[johnaries]

25. Too late. The other dominoes have already started dropping.

It's not JUST the mortgages anymore. It's gone way beyond that. And every day more dominoes are falling.

You can pick up the first domino, but that doesn't keep the others from continuing to knock the rest down.

[Hannah Bell]

28. they've been dropping for 2 years. & if the milk's spilt, then this bailout won't put it back in

the glass any better than buying up the mortgages.

but buying up the mortgages would keep the money out of the hands of crooks like paulson.

[johnaries]

32. Simply buying up the mortgages won't help the other problems and

puts the taxpayers at greater risk.

Again, the bill says that the Secretary MUST receive additional assests from the institutions being "bailed out" unless prohibited by law, which reduces the liabilities of the taxpayers.

And don't say "have you read it? it's lies!" because I have posted the exact language above - it's obvious YOU haven't read it.

[mhatrw]

34. Why not? Just guarantee the loan payments.

Nationalize the housing market, not the speculators.

[johnaries]

35. Because it is no longer about the mortgages. It's now about

commercial paper. The short-term loans that allow businesses to conduct business on a day-to-day basis.
http://www.npr.org/templates/story/story.php?storyId=95099470

And it's about market confidence. We have already seen both runs on banks and runs on the market. They will only get worse unless we do more than just secure the outstanding mortgages. They may have been the straw that broke the camel's back, but now we have to fix it's back.

[mhatrw]

39. How about we try to fix the underlying cause here as well rather than just

handing Goldman Sachs a $700 billion line of taxpayer credit to buy any bad assets it wants to at any price with no real conditions or oversight?

I'd rather have the government issuing short term commercial papers at a profit than taking on bad assets at a huge loss.

[ColbertWatcher]

10. Well done, Hannah! Bravo! n/t

[SammyWinstonJack]

12. Why do you hate "Murica?

:evilgrin:

[Hannah Bell]

29. cause murica hates me & mine.

[leftofthedial]

21. and we know where those bad mortgages are,

They're in the area around Wall Street and Washington DC and east, west, south and north somewhat.

[BelgianMadCow]

23. Is it bad? Yes it is. Are we guilty? No. Do you understand? Somewhat

Need I go on? You look puzzled.

I SO not miss him.

[tjwash]

38. 4-how much did the banks recoup from the PMI?

Everyone I talk to about this seems to forget that when you do not put 20 percent down on a place (which also happens to be the vast majority of people that have the subprime and adjustable rate loans), the banks always require that they buy PMI with it, and it usually gets bundled in to the payment.

There has got to be a major chunk of billions in PMI that the banks collected after the loans went default.

So, what happened to that money?

[mhatrw]

40. They leveraged it to bet big that housing prices would keep increasing. n/t

[Supersedeas]

65. details that will have to wait until after the Wall Street bailout to discuss

[mellowfellowO]

41. A humble opinion...

I'm a long time reader of DU, and this is my first post.
I'll give you a little background about myself; I am a British
citizen who has lived here for twety years. I came here for
college at the tender age of 19. Recently, I lost both my
house (1st) and my wife (2nd) :) 

I have come to love this country as I would love my own. The
people here, particularly, the ones who truly love it, have
become close friends, so it pains me to see these last eight
years here, where it seems like a collective insanity has
gripped it. I know this is off thread, but PLEASE: don't stop
fighting. The conservatives here have lost their minds and
seem to be all to willing to run the country into the ground.
Thank each and every one of of you for believing, being angry,
and fighting. I'm glad to see the spirit here that was there
during the "rebellion" (as we refer to it...ha ha).
Don't let your differences separate you. You've got the
bastards on the ropes. Now knock them out.

I will be returning to the UK in a few months, but I hope to
chat and get to know quite a few of you before then.

Cheers!

[Occulus]

50. Thank you for that

And welcome to DU! :hi:

[mellowfellowO]

64. You're Welcome...

Thank you for the warm welcome. You might say after losing everything, I've found my voice. I was always afraid to jeopardize anything because of INS and Homeland Security, but since I'm leaving, I stopped caring. I want to speak up, even if I can't have any impact in terms of voting, I can stand in solidarity, at the very least.

[2speak]

45. Great post

your on to something.

[BzaDem]

48. I could explain it all for you

but what's the point. It's not trivial to understand, so someone tomorrow would post another question like "the problems with our economy aren't trivial, so how could anything be wrong?"

If you really want to know just do a Google search for the financial crisis.

[Dover]

49. And I find this disturbing, re: Obama's choice of Rubin as an economic adviser >>

who oversaw that repeal as well. It's a friggin revolving door!

From the OP link:

Just days after the (Clinton) administration (including the Treasury Department) agrees to support the repeal, Treasury Secretary Robert Rubin, the former co-chairman of a major Wall Street investment bank, Goldman Sachs, raises eyebrows by accepting a top job at Citigroup as Weill's chief lieutenant. The previous year, Weill had called Secretary Rubin to give him advance notice of the upcoming merger announcement. When Weill told Rubin he had some important news, the secretary reportedly quipped, "You're buying the government?"

[girl gone mad]

55. Not the mortgages, so much as the mortgage backed securities..

I started a thread on Credit Default Swaps this morning.

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=4129938&mesg_id=4129938