US goverment to buy bad debt

Discussion in 'Business & Economics' started by Asguard, Sep 22, 2008.

  1. Asguard Kiss my dark side Valued Senior Member

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    23,049
    recently it has been anounced that the US goverment is going to buy the bad debt that wall street holds and i was wondering what they are then going to do with it. As most of this bad debt is in peoples houses will they renegotiate those loans so that the people can aford to pay for there house or are they simply going to evict them.

    In another thread michael was pointing out that in a capitlist sociaty people must be alowed to go bankrupt and i pointed out that he should have said COMPANIES and not people, that every effort should be made to protect people from going bankrupt.

    so far it seems that the goverment is more interested in protecting the companies which caused this situation rather than the people facing the loss of there house. A similar comment was made by the former oposition leader, where he said "people should sympathise with banks who dont want to evict people". this was an idiotic comment which partially lead to his end as the oposition leader
     
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  3. cosmictraveler Be kind to yourself always. Valued Senior Member

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    The people who have loans outstanding will PROBABLY be given different terms and interest rates when all this starts to unfold. Instead of making those responsible for giving the loans to people who should not have gotten them incur severe penalties like jail and fines there's going to be a "slap on the wrist" and everything goes back to "normal" once again. The money has been extracted by many who used the system to their advantage and the taxpayers are now stuck with the bill. Those wanting to renew their loans will do so and those who cannot will just lose whatever they put in.
     
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  5. joepistole Deacon Blues Valued Senior Member

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    This is necessary. Unfortunately, the damage has already been done. The situation is like a liner at sea that has a gapping hole in its side. The reason for the hole is now not material. What is material, is keeping the ship afloat. The robbers in this case have already made off with the booty.
    It was not the employees of the firms involved, but rather the executives of the firms. They were smart enough and wealthy enough to buy off congress with the repeal of the Glass-Steagall Act in 1999. They covered their bases before the crime was committed. They cannot now be prosecuted because they changed the law to make what was formerly illegal not legal.
    The real issue here is lobbyist and corruption in government. That is the underlying problem that continues to afflict us and it must be corrected.
     
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  7. cosmictraveler Be kind to yourself always. Valued Senior Member

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    That's very difficult to do since Congress makes the rules for itself as well as all businesses. So with Congress in total control of everything that is linked to money how do you stop them?:shrug:
     
  8. joepistole Deacon Blues Valued Senior Member

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  9. cosmictraveler Be kind to yourself always. Valued Senior Member

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    But it must be ratified by at least two thirds of the members of Congress and do you think they will consider cutting their money supply off...???
     
  10. joepistole Deacon Blues Valued Senior Member

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    Only if the voters force their hand.
     
  11. cosmictraveler Be kind to yourself always. Valued Senior Member

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    The voters cannot force Congress into making a new amendment to the Constitution, just how do you ever think they could?
     
  12. joepistole Deacon Blues Valued Senior Member

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    By voting out those who do not support it.
     
  13. Xelios We're setting you adrift idiot Registered Senior Member

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    US public debt will be over $10 trillion after this, how are they planning on paying this off?
     
  14. Captain Kremmen All aboard, me Hearties! Valued Senior Member

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    Can anyone explain where this $700 Billion is going to come from?
    Is it borrowed, if so from whom.
    I thought that lack of available money for borrowing was the root of the problem.
    Or did they have it in some kind of reserve?
    Or are they going to raise it in taxes?
    Or are they simply going to print the money?

    It seems very convenient that this huge wad of money has appeared.
    What's its origin?

    Also, why would the USA stump up £700 Billion without getting agreements from other countries to also put up proportionate amounts, and spread the risk. Seems to me like the US is taking the lions share of any problems that might come from this action.
    Why would they do that?
     
    Last edited: Sep 22, 2008
  15. S.A.M. uniquely dreadful Valued Senior Member

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    72,825
    Raise inflation. Anytime you want to see the real worth of any society compare interest rates with inflation, that will tell you exactly what your money is worth.

    http://business.theage.com.au/business/us-dollar-may-get-crushed-over-bailout-20080922-4l6d.html

    Btw, its interesting that Hank Paulson used to be CEO of Goldman.

    http://www.ustreas.gov/organization/bios/paulson-e.html
     
  16. BlueMoose Guest

    I posted all this already in Fannie&Freddie thread, but I think it suits better
    here now, there can be some clues offered in that....

    I think this is pretty interesting side note. I was watching yesterday our (Finland) news, and there was it, the same thing that happened here in Finland what I´ve mentioned here before,major bank crisis, then Government comes to rescue by forming "garbage bank" (I dont know the right term yet, but thats how it was called here), and that bank handle all the mess created. What was interesting is that US handlers of the issue are asking direct help from us via information exchange, how did we handle it and how it all went, but wait, the real punchline was the last sentence of that news anchor, he implied that first contacts over the issue had been made in spring. ? .

    And this is how it was...

    Finnish economists recall when their banking system collapsed in the early 1990s, writes Derek Scally in Helsinki

    PUSHING OPEN the heavy wooden door of the Bank of Finland, a hulking Russian-German architectural landmark in downtown Helsinki, it's hard to imagine that these austere halls once echoed with the sound of economic panic.

    Yet, in 1991, Finland was hit by a crisis that shook the foundations of its banking system and forced a state takeover of the leading savings bank. By far the most severe of a wave of Nordic banking crises, the Bank of Finland's rescue plan cost the taxpayer some 8 per cent of GDP and left a legacy of thousands of bankruptcies.

    Finnish experts say that there was no classic recipe for their banking crisis. It boiled down to a mixture of bad luck, bad policies and bad banking.

    Today's Ireland is very different from the Finland of 1991, yet warning bells begin to sound when veterans of the Finnish crisis recount their experiences - like their description of the Finnish credit bubble of the late 1980s, inflated by a new era of easy money where, as one analyst puts it, "euphoria supplanted risk analysis".

    "There was no proper understanding of risk management in Finnish banks then," said Pertti Pylkkönen, senior economist at the financial stability division of the Bank of Finland. "I'm sure Irish banks have much more modern supervisory systems now, don't they?"

    To believe the financial experts of the time, the Finnish banking crisis came from nowhere. The country had enjoyed a decade of steady economic growth thanks to strong exports to western Europe and lucrative bilateral trade agreements with the Soviet Union, exchanging expensive Finnish goods for relatively cheap Soviet oil."
    http://www.irishtimes.com/newspaper/...138433311.html

    And this is how it was after...

    The Finnish - and international - financial markets have been under enormous pressure for change in recent years.
    In the European Union, increasing progress has been made at integrating the financial markets. This progress have been abetted since the mid-1990s by harmonisation of financial legislation, dismantlement of regulation, new financial products, and technological progress. Cross-border trade in financial services has begun to surge, albeit growth rates differ for the various sectors. Introduction of the euro - first as account money, with notes and coins added at the start of 2002 - has spurred integration. Competition has tightened, while the borders between different sectors - banking, securities markets, insurance - have narrowed.

    Progress in integration, new products, technological progress, and sector crossovers have fomented considerably pressure for change in financial and insurance legislation and supervision. For the banking sector, cross-border supervision of financial institutions presents a huge challenge.

    Investors and those in need of financing benefit from tighter competition because financial services become more diversified, quality improves, and prices fall. From the perspective of the Finish investor, the euro has brought a manifold increase in investment outlets free of exchange rate risk, which has facilitated the spreading of risks. In recent years, foreign investors have become much more active in the Finnish financial markets, due to the liquidity of Finnish debt instruments and availability of financing.

    The structure of the Finnish banking sector has changed substantially, partly as a result of the banking crisis of the early 1990s and subsequent integration and technological advancement. The changes have been significant also in the insurance sector, and Finland has experienced the creation of ‘financial conglomerates’ that produce and sell a wide variety of financial services.

    The financial infrastructure, ie payment and settlement systems and exchanges, has also been in a continual process of change since the mid-1990s. Finland’s membership in the European System of Central Banks and introduction of the euro have accelerated the restructuring as well as technological progress.
    http://www.bof.fi/en/julkaisut/selvitykset_ja_raportit/yleistajuiset_selvitykset/2003/a_105.htm
     
    Last edited by a moderator: Sep 22, 2008
  17. Pandaemoni Valued Senior Member

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    3,634
    Not exactly. The government is not (likely) going to buy individual mortgages. They will buy "mortgage backed" notes, which means bonds that are paid off from the proceeds of mortgage loans and are secured by the mortgages themselves. When an individual mortgage defaults, the note holder doesn't care, because it takes a great deal of defaults to trip up their payment stream...in fact the notes assume a certain proportion of defaults.

    So what happens when an individual mortgagee defaults? The bank that originated the loan will enforce it. From the homeowner's perspective, none of the "repackaging" of the mortgage loan is visible. When many more mortgages default than were anticipated, the government will directly seize the mortgages from the note-issuer (usually a corporation whose sole function is to hold a specific set of mortgages related to a specific set of notes, aka an "SPV"), but the originating banks will continue to "service" the mortgage loans.

    The government is likely to buy them, moreover, at a deep discount. So the government will spend $700 million, but get many billions of dollars worth of notes. Hopefully the discount will be deep enough fr the government to get a bit of a return on this mess.

    The situation is complex. This is not a case of evil men twirling their mustaches in a smoke-filled board room of a giant corporation, and innocent home owners looking to get a piece of the American dream. There were really two effects to consider:

    (i) Fraud. There definitely was a lot of fraud out there that helped to cause all of this, but the fraud was not high up in the corporate board rooms, it was far lower in the chain, at the level of the retail banks and their individual loan officers. Many loan officers were making loans that never should have been made, even under their bank's own lax credit standards, and they were faking documents and using "phantom income" to justify these loans. They did it because they knew that (a) their bonuses were ties to originations, (b) the retail banks just sold the loans to the SPV anyway, so their employer bore no real risk, and (c) besides, who defaults when the real estate markets keep going up?

    The fraud in this case was by local branches of retail banks against the people who were buying the mortgage backed notes. Those noteholders were being told, by the retail banks, that the loans complied with credit and collection rules that, in many cases, they did not.

    (ii) Irrational exuberance. A lot of the trouble—perhaps even most of it—came from the people who thought housing prices couldn't fall. There were serious people pushing the idea that we were now immune from the boom-bust cycle that weighed down prior centuries. While not everyone went that far, belief in the rising housing market was strong and the influence of these overly optimistic people permeated all levels of the business world including the rating agencies, the note purchasers (running from insurance companies, pension funds and even just local communities looking to invest), commercial banks, retail banks, underwriters *and* homeowners.

    When these things happen, people move is vast herds under the mistaken belief that prices will keep going up. Eventually reality sets in, and the bubble bursts, but most people don't see it coming until it's too late. This happens in a lot of markets and people are generally blind to it. It's been happening for centuries, and yet it's hard to see until the bubble bursts.

    The homeowners generally misvalued the homes they were buying too, and many really believed they could afford the debt they were incurring based on the ease of refinancing (which in turn depended on the rising value if their homes). That doesn't make them "culpable" for anything (except to the extent they misstated or cooperated with corrupt loan officers in misstating their income, which many did), but it places them in the same position as corporate officers far above them in the chain.

    People at all levels "caused" this problem, really. It was a group effort.
     
  18. S.A.M. uniquely dreadful Valued Senior Member

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  19. Captain Kremmen All aboard, me Hearties! Valued Senior Member

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    The US Government bailout package is for 700 Billion Dollars.
     
  20. Captain Kremmen All aboard, me Hearties! Valued Senior Member

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    In answer to my own question, I have found this on Reuters

    The government could acquire up to $700 billion in home and commercial mortgages and related assets from U.S.-headquartered banks and other institutions over the next two years. Precisely how the purchases would be executed was unclear.
    To allow for the bailout, the U.S. government's debt limit would rise to $11.315 trillion from $10.615 trillion.


    The plan still needs to be approved by congress.
    Are they going to allow this?
     
    Last edited: Sep 22, 2008
  21. joepistole Deacon Blues Valued Senior Member

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    They don't have much choice. They will insist on some oversite that the bushies don't want. The bushies want another blank check...they have grown accustomed to blank checks from congress and I think everyone is getting tired of it. There is only two ways to get the 75 billion:
    - issue debt
    - print more money
     
  22. Captain Kremmen All aboard, me Hearties! Valued Senior Member

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    If they print the money, the value of the dollar will fall.
    Oil prices, priced in dollars, will go through the roof.

    I have a horrible feeling that this solution is only short term.
     
  23. joepistole Deacon Blues Valued Senior Member

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    Yes it is a short term solution. The problem is durring the last 14 years (since the Republican take over of Congress) the country has gone seriously astray. This is not the country I grew up in. This is a very different and very scary thing.

    The problems the country faces are miriad. This only solves the liquidity problem. I just do not see how we can avoid rampant inflation. I have seen this coming for decades. But it is finally here. In order to get out of it we need an outstanding leader...one who can motivate and direct people and knows where to go...that person is Obama.
     

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