Monday, September 15, 2008

Bailout Blather

In a prior thread, DA (Danny Ainge?) asked me to envision the financial landscape with no government taxpayer bailout of Fannie and Freddie Mac bondholders.

Well, quite simply, Agency bondholders need to take a haircut (10-20%) on their interest payments. In other words, the people who bought Fannie and Freddie bonds will have to agree to a lower rate of return than they signed up for. I believe they could refuse and push the agencies into bankruptcy, but then they would just be stuck with the *assets* of Fannie and Freddie. And, obviously, the underlying assets aren't performing as well as advertised.

Most of the people that own Agency bonds are wealthy individuals, hedgefunds, financial institutions, and foreign governments. These people lose money all the time on investments where no one *bails them out* and they have survived.

The mortgage market predates Fannie and Freddie by quite some time; AND it will live on well past their demise. This *bailout* won't do diddly for the housing market as the now explicitly-sponsored entity(s) in all likelihood won't be allowed to expand their balance sheets. Sure the big banks will dress up some of the toxic loans on their books and try to dump them onto taxpayers (through this new entity), BUT, for the most part, all the government will be doing is keeping wealthy bondholders whole.

I, for one, wouldn't be surprised to see the "private mortgage market" start to grow. This is where private individuals write mortgages most usually to people they have vetted or know (family). I think private mortgages may gain steam not only because the banks are reeling in their credit exposure, but also because CDs are paying such paltry yields.

If you had excess cash, would you want to put it all in 3% CDs spread around at different banks OR would you maybe be comfortable lending say 300k at 6-7% to a young professional couple so they can buy a house down the street whose value you think you have a good handle on?

No matter what the government does or tries to do, house prices are going to fall 20-30% to get back in line with median incomes. It'll be at least 20 years before Morons bid them back up to the insane levels of 2005-2006.

Don't buy the government's fear-mongering lines about staving off *systematic collapse* or about Fannie's failure setting off an *economic spiral*. If you chronically believe the rhetoric of politicians (healthcare "crisis", obesity "crisis", WMDs, Bear Stearns "must be saved", illegals "doing jobs Americans won't do", global warming "crisis", etc.) then I can't help you.

The fact is, nobody has any clear idea of what will happen in the future. AND, the last people I am going to look for guidance are the politicians who created the fiasco in the first place.

Probably the only way Big Government could help prop up housing prices in the slightest would be by raising household incomes. That would require massive tax cuts. Certainly don't bet on that!


Anonymous said...

i have a private mortgage on my home and my business. Good way for my folks to invest. Its like an annuity to my retired parents. Have had the mortgage for several years now. They actually rent the property from me that they hold the mortgage on!

Slow out.

DA said...

Hi C:

Thanks for your response and for giving me some street-cred as Danny Ainge. I'll take it!

I appreciate your post to educate me and others. I shall continue to read Barry R., John M., and others to help me understand.

DA (That's Mr. Ainge to you)

Anonymous said...

Hi C:

Sorry. I forgot to ask you about what Warren B described as financial "weapons of mass destruction" (i.e. derivatives).

I believe many institutions cite exposure to those as reasons for worry.


DA (Mr. Ainge)

Anonymous said...

No post on the L-Bro collapse, CNut? And have you totally abandoned Rich's blog ? Been missing your comments there. Please make time !

CaptiousNut said...


Lehman and financial WMD???

I'll need to turn my brain on for those subjects. I'll make a point of getting to them.

As for "Political Rules"....I am trying to break away from it. If Rich devoted more time to it, it would be great. He gets paid to make speeches; and earns nothing from his blog. I wouldn't be surprised to see it discontinued. If they paid me, I'd run it!

kingdom media said...

from a historical standpoint it's hard to object to the government's mass bailouts since similar debt-producing methods were put into action to save the U.S. from the Depression; maybe we've been headed for socialism this entire time...