Originally Posted by Ardy
Sarcasm aside for a moment

these "toxic" loans have two distinct ways in which they are causing problems.

One way is the obvious way--- they are worth a whole lot less than face value and so someone will have to write off a lot of money. Never the less, these loans should have a value greater than zero... they are based upon loans on real estate that still exists--- even if less valuable that when the loan was written.

The second part has to do with valuation and liquidity. This is the issue that no one really knows what the loans are worth, and no one is willing to buy them at any price... and so the financial institution has to carry the loans at very low prices on their books... which results ins illiquidity... which means that the institution cannot do even it's normal lending business with well established customers... and so the credit markets are frozen... which in turn affects the entire economy.


So, lets say the government buys these loans... not at face value, but at some discount... say 50% discount. This is probably a realistic valuation of the underlying assets after all of the current problems settle out. And ... after all of this settle out, the government ... in theory, can wind down these loans by gradually selling all the properties, or re-financing the loans at realistic mortgage valuations. And there is some reason to expect under this scenario that the government would not come out a huge looser.... and... if handled correctly... the government could even make money on the deal... which I admit is a long shot based on how things usually work.

But along with the above come the impact of these "bailout" on the second factor I listed.... the general illiquidity of the system. And it turns out that buy buying up all these illiquid securities... even at a substantial discount... it is a great benefit for the banks and economy at large because now there is money to lend to do normal sorts of business.

And that is how... in theory... this could all work out to save the economy and allow the banks to get back into their normal line of business even whole those same banks would have to recognized very large losses on the securities taken over by the government.

But, as was discussed in committee today, what if the loans are sold to the government for MORE than they are worth?

The banks and lending institutions, regardless of the pisspoor job they did in handing out those loans, will benefit from the bailout.

The homeowner, who may have entered into the agreement seeing the world through rose colored glasses, won't benefit at all.

The country as a whole will be hamstrung by the incredible amount of money being diverted from important citizen projects, into banks and lending institutions.