Capitol Hill Blue Forums Political Issues Finance, the economy & Economics How will the financial crisis develop?

Daniel Gross - Newsweek

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But, but, but...don't you know that all these "toxic loans" that the government will end up owning will eventually increase in value, maybe even make a profit, and pay back the taxpayers with interest? Maybe just like how Iraq's oil profits paid for the reconstruction and revitalization of that country...?
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What was it that P.T. Barnum said about suckers....?

Something about a Republican being born every minute...??

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.

Email from Naoimi Klein:

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.

This is the main problem and this is the reason I don't trust the government to do a good job with this. Banks have already written down a lot of losses on those loans and if they will now sell those to the government at face value when they were originated then I think that is plain wrong.

It is not hard to find average current market price for a property and I think the government should pay that and nothing more for a loan, even if the face value of the loan is 100,000 dollars higher.

I agree that would be VERY wrong. And as I understand it, that is not what is now being considered.... ie to take these loans at original face value.

If one were to price real estate in any given market before subprime loans were widely available (approximately 2003) one would have a pretty good idea of the value of a property attached by a mortgage. These houses are indeed worth something but they won’t begin selling in sufficient numbers until buyers feel confident a bottom has been reached (IMO 2003 levels) and, as Ardy says, money is available.

Most of California real estate values already have dropped to 2003 levels, which is double 1998 levels. If someone has not purchased a house there in the last few years they are probably not underwater and have accumulated quite a bit of equity. But if lenders are unwilling to lend, or funds simply are not available, we indeed have a problem.