The Unfinished Bail-Out Bill And Some History Of Another Crisis

First, this isn’t Bush’s plan. It’s the plan of experienced financial leadership, in government and mostly outside, of pretty realistic people trying to overcome the bullshit passed years ago that caused this mess. Bush couldn’t explain the details of this plan if he had a….well he just couldn’t. [This is a long post but please stick with it.]

The leadership in Congress, also, has made it clear that the homeowner and middle class has to be included or it’s not going to pass. The leadership, however,  isn’t in a real strong position. If they don’t pass some bill, even an interim bill, then they will be blamed for a possible meltdown. And the election will go to McCain. If Bush vetoed an interim bill, causing more stress on the world markets, then the election goes to Obama.

Since the bill isn’t finished anyone talking as if they know the details doesn’t. No one will know the details until the actual finished product is printed and read after negotiation with leadership. One of the other primary essential realities of this situation not mentioned in those links is that the bailout essentially buys distressed assets (mortgages) for a very small amount compared to face value. They are however ASSETS. Most of the 500B initially allocated, and expected to be used, will be secured by this ‘paper’, as it’s called in the business.

Also not being mentioned most of the time,  mortgages have no holding cost and a defined market value that increases over time if bought for a song. It’s a question of timing as to when to start to liquidate the assets. In this case, once the ‘sub-prime’ mortgages develop a 2 or 3 year history of good payments they are no longer subprime. They could be refinanced into a conventional loan or the paper simply sold at much more than the purchase price.

If the house has devalued and they are mortgage over value then the short sale or short refinance (the very likely most risk-limiting path) will end the governments involvement and bring cash to the program.  A  loss on an asset is acceptable compared to the cost of the sale of a foreclosed house. The foreclosure process and selling that foreclosure is a much more complicated process that leads to much, much greater losses. (much more on the flip)

It’s already been announced over a month ago, there is going to be a new program through FHA that will allow people to refinance out of these loans that kicks some date in October. Loss mitigation specialists are popping up all over the place to work with lenders already. And they are having success. The lenders are writing off parts of the mortgage and/or ‘recasting’ the mortgages into a rate and term that the owner can afford.

Hell, one of my friends got his mortgage, even though he had some equity in the house, recast down to 3.95% for the balance of the life of the loan. Now that’s a mortgage that going to be paid and the interest rate is still equal to the cost of funds if not more.

Remember in the S&L crisis there was also a deep seated fear that the system would melt down. We experienced big losses but no melt down. Some of the stupid moves by the banking regulators and the RTC made it even worse. And yet we got through it.

This is NOT a giveaway. Our government is going to take a hit but if they are patient and show some common sense this ASSET BASED bailout is far different than being seen by columnists that think the assets have no value. While the loss will be in the billions it won’t be as much as some are saying. There will NOT be a complete loss of 700B. The eventual sale of the assets, mortgages and houses, will bring much more cash than is being printed in the headlines.

My history to  back up this analysis:
Having lived and worked very closely with some of the biggest organizations in the S&L crisis, I know for a fact that one of the primary mistakes made at that time was trying to liquidate the primary assets of that crisis immediately.  When they appointed the RTC as the final authority they started really almost giving away real estate. I know. I was buying apartment buildings with both hands in Texas. My partner and I bought and sold to Californians 400-500  units in small buildings. I think the largest we bought and sold was a 20 unit building. We should have kept half and we would have been millionaires within five years.

I knew many of the names that would be familiar including Charlie Keating. Hell, I used to sit in his office in Irvine. Charlie screwed up when he sold unregistered securities to retirees. It was the securities violation that got him in jail. If I had listened to his advise I’d be sitting pretty owning a couple of Texas Holiday Inn’s and a bunch of single families.

If, however,  they’d (the government) have left him and some of the other big organizations alone to work out their real estate problems we’d never have had the blow up we did. Keating’s really different as an individual as he broke the securities law. There’s a whole history I could write about the mistakes made at that time. It seems that history is being remembered right now.

Real estate, however, is far different than holding mortgages.

Oh yeah, I’ve got 28 years experience mostly in investment and mortgage real estate.

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15 Responses to The Unfinished Bail-Out Bill And Some History Of Another Crisis

  1. Darrell Prows says:

    We must never lose sight of the fact that the only goal that really matters now is to stop the foreclosures/ Without the foreclosure tsunami all of this paper would still be marketable. It is unmarketable only because no one knows how to tell the amount of real estate collateral that is going to have to be foreclosed upon, or what affect on real estate vallues having all of this inventory on the market is going to have. More foreclosures means lower real estate values and lower real estate values means more foreclosures. Stop the cycle and the healing can begin. Don’t stop the cycle and there’s no reason to believe that the worst case estimates of losses from this program will not end up being exceeded.

  2. Stuart

    The “experienced financial leadership” were all chosen by Bush and they are doing his bidding, IMO and the opinion of other Dems who are also not looking at this plan as one that will fix the mess. I think most of us would have more confidence if the leadership was different.

  3. David Atkins says:

    Preposterous analysis, but typical of someone ensconced in the industry who thinks all that “paper” is worth something.The key here is that what’s going on is NOT a liquidity crisis.  It’s an asset devaluation.  What they’re doing *might* work if it were a liquidity crisis–though there’s a strong case to be made that the Wall St. f***ers should just be allowed to crash and burn rather than be propped up in the current grossly immoral system.  But it’s not.  It’s not that banks are seizing because they just don’t have enough to keep lending: it’s that all they own–their mortgage-backed securities for sure, but also their credit card loans and all the stocks in all the overinflated companies–is just way overvalue right now.  Millions of people will simply default on their credit cards just as surely as subprimes and alt-as default on their mortgages.  The Dow and S&P should by all rights lose around 30% to 35% of their value or so.  That’s around what all that “paper” is really worth. Which means one of two things: either the assholes in charge are too stupid to realize it’s not just a liquidity crisis, in which case they’re mortally dangerous to anything they touch, or they *do* realize it’s an actual asset devaluation, and they’re simply trying to pillage the treasury for all it’s worth to give to the rich so they can buy up as many foreign investment vehicles as possible.  Either way, we’re fucked.  And I don’t see there’s anything we can really do about it because we’re damned if we do and damned if we don’t.  In fact, by Friday it may be too late to do anything, anyway, even if MFing Paulsen and his buddies do get their way.

  4. Darrell Prows says:

    David: The contraction in value of leveraged investments is a direct reduction of core capital, and, because of the leverage, has a magnified affect in reducing liquidity. One of the areas for regulation will be to control the use of leverage but we have to deal with the crisis that we really have and not the one that you wish we had. When housing inventory starts decreasing, instead of increasing, we’ll be at the bottom of the problem and we can start growing from there.

  5. Behold coporate ho’ism at it’s best: Goldman, Morgan to Become Full-Fledged Banks

    I’ll repeat again – this bail out stinks. It’s only helping the large corporate ho’s and as Nancy Pelois, Obama and others are now pointing out it leaves out support for homeowners and the little people being hurt and hit hard by this mess.

    FYI – large corporations are getting bailed out and small (and micro) businesses can not get SBA loans right now. There is something truly wrong with this picture.

    Yes Darrell we need to stop the housing bleeding, but not in a way that large corporations get rich and the little people lose everything.

  6. Jack Bailey says:

    The bailout isn’t a giveaway of taxpayer dollars. The government is going to buy mortgages and mortgage backed financial documents from banks and financial institutions MARKED DOWN below 40% of their original value. The government will hold collateral, residential and commercial reale state MARKED DOWN to 40% or below its original value. Foreclosed properties can be sold at bargain prices of 50% or more of its orginal value. As the economy begins to stabilize, the financial documents will increase in value.
    This so-called bailout is a win-win situation for most takpayers and house hunters. Even strapped homeowners will have an opportunity to readjust the their mortgages.
    The losers: Shareholders in financial instutions, holders of mortggage backed securities and housing speculators.

  7. Here’s another link – Paulson’s Plunder

    Honestly I am too pissed off about this mess to even write about it in the past couple of days. The economic crisis has hit my business big time. I’m not a happy camper.

  8. John Stone says:

    I have heard numerous right wing nuts say that this crisis is the fault of the Bill Clinton and our Democratic Congress.Get real people, Bill Clinton has been out of office since 2000 and the Democrats have had a majority in both  the House and Senate only since January 2007.  This is   just another of the  effects of the failed Bush-Cheney Administration, in letting Corporate America run wild and unregulated! 

  9. WillCJustice says:

    I am not a young man, but never in my lifetime have I seen anything as reminiscent of Hoover‘s Great Depression as America today–banks failing and hundreds of thousands of Americans losing their homes.  For the first time in my lifetime, people are worried about whether the money they have in the bank is safe.
    This nation cannot afford four more years of Republican rule.  And there’s one big reason.
    Forget personalities, inexperience. racism, sexism, and war hero talk.   It’s the ideas that the candidates and the parties cherish that really matter.
    The same ideas that produced the Hoover Depression are alive and well in today’s Republican party–no taxes for the rich, subsidies for big corporations, no government regulation by the federal government, and the supremacy of states rights.
    Change the name from Hoover to McCain to Palin on  the economy, and the answers they give are interchangeable.
    I’ve shortened my comments here because I know I’m blogging, but if you want to see more on this subject, go to a great website I found with the url http://www.howtotalkback.
    I personally heard Rush Limbaugh say that it was his goal to undo everything that FDR did.
    Now it’s no secret that nobody has more influence over Republican thought than Rush.  And it’s no secret what Rush believes: government is bad and federal regulation is a plague.
    But I wonder if Rush realizes that the FDIC–a program of the federal government put in place by FDR–is the main thing right now that’s keeping America from an economic collapse.
    One of my friends asked me why I wasn’t voting Republican.  “Don’t you want to keep more of your money?”
    My answer? If Republicans continue to rule, and they follow the Hoover, McCain, Palin script, AND THE BANKS FAIL, neither she nor I will have any money to keep.
    What we need is a President who sounds like FDR, not a Hoover sound-alike.  –Will C. Justice

  10. Of course I agree that a R win would be the ultimate disaster, but Bush isn’t even involved in these negotiations and wouldn’t have enough Wall Street knowledge to even try to give direction.

    The conversion today of Major Firms to banks rather than investment banks means more money to lend at the street level not this bullshit 20-1 leverage possible with some securities. Back to some form of basics is the name of the game. Yes stopping the foreclosure crisis is a major part of the path. I am still a believer that a major if this money will be ASSET backed. Whether someone wants to believe that it will be invested in somesort of unsecured instrument is up to them. Perhaps some of it will on a limited basis. But everyone knows that this is a RE lead recession and sooner that’s addressed and the restructure of Wall Street is over the better.

    Great article on Bloomberg. Some take it as a negative that Goldman Sach’s and Morgan Stanley changed business models last night and I think it’s the best news in town. The last two decades of nearly unregulated, innovative bullshit on Wall Street is ending. Two decades folks starting right after the S&L bullshit. Two decades was enough for the consequences to come home.  But it was on our watch too. But most of the real shit has happened in the last 8 years. That’s when the mortgage business began to rely on subprime business and Internet phone room mortgage companies became the norm rather than just a blip on the radar.

  11. Stuart

    Where exactly do you get that Bush is not involved? His administration is involved – his appointed financial leaders are involved. He IS involved.

    NY Times today: “President Bush urged the legislators to resist the temptation to add provisions that, he said, “would undermine the effectiveness of the plan.””

    This plan does nothing – absolutely didly squat to help the home-owners and the little people hurt by this big mess and the corporate ho’s get to keep all their big bonuses.

    The market dropped again today by I think 370 points – see NY Times. Maybe you see this as good plan, but the majority of the public and the Dems do not. See my post.

  12. nevermind says:

    Obama enough is enough your words – bail out people not wall street. We were screwed twice once on mortgage fraud and then on gas manipulation.

    You want my vote – take a stand


  13. jason says:

    Greatest heist in history. Planned with precision. Bail out or no bail out, the real assets goin out the back door, and here is a piece of the bill, (the draft anyway)
    Sec. 8. Review.
    Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency

  14. jason says:

    Ron Paul has been warning about this for 30 years, listening yet>?

  15. Dave Zickefoose says:

    If the bill is so great why don’t Democrats vote it in?  Democrats control both the House and Senate.The bill didn’t make it because a number of  Democrats to vote ‘no.’