US goverment to buy bad debt

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

  1. BlueMoose Guest

    I´ve been saying this before, but I have gut feeling that all this will boil down to North American Union, just look how it was handled here in Finland back then, we were told daily basis that EU and € would make us safe after the "hyper-capitalism" screwed our currency Markka and our economy, and we gave it up, not saying was it good or bad, we didnt have a choice in the matter at that point. Its done step by step so slowly that you dont feel a thing

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    Am I wrong but I remember that some kind signings has been made between US, Mex and Can. about free trade and stuff that comes with it.
     
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  3. Xelios We're setting you adrift idiot Registered Senior Member

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    It's not even a solution, it's just pushing the bad debt into a different corner.
     
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  5. Pandaemoni Valued Senior Member

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    A typo on my part.
     
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  7. Pandaemoni Valued Senior Member

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    The debt is not quite as "bad" as it seems. The truth is that the default rate on mortgages is high, but it's not 50% or anything that crazy. Let's say there are $2 trillion worth of notes (in pre-collapse terms) ready to be be bought and the government buys 75% of those, so $1.5 trillion for a purchase price of $700 million. The accounting rules, post-crisis say that those notes have to be written off, as if they were worthless, because they cannot be adequately valued and they are definitely not worth the $2 trillion people thought they were. Once the notes are sold ($1.5 trillion in nominal value, with a book value of $0, sold for a $700 million cash payment), the companies will be allowed to adjust their balance sheets to reflect the $700 million received rather than the $0 they are taking now. That's still a loss, but not as bad a loss and it saves them from the liquidity crisis that is affecting most of them because they now have $700 million in cash.

    If we assume the actual default rate on mortgages will top out at 30% (which is generally pessimistic, unless Congress encourages defaults—which it may—through debt forgiveness, whereupon many people who would have otherwise paid up may rationally opt to default). That 30% default rate would mean that the actual value of the notes would be $1.4 trillion overall, and the value of the notes the government bought would be $1.05 trillion. From the government's standpoint, under these assumptions, it made out well. The companies still lost big, but the government recouped its investment plus some.

    The question is how big a discount will the government actually get on this stuff? Getting $1.5 trillion for $700 million paid, may be way off. That said the government is presently proposing a reverse auction for the securities, so the banks, as sellers, would have to submit bids to the government. The lowest bids win, up to the first $700 million spent. In that case the companies that most desperately need the liquidity and willing to most deeply discount their own notes are likely to win.

    That said, unless all mortgages tank everywhere, these debts simply won't all be "bad" and it's not clear that the government (taken in isolation) will lose money on this.

    As with AIG the problem is not so much with the value of the assets of the companies involved, the problem is that the assets can't be valued accurately and that has triggered a severe liquidity shortage.
     
  8. Asguard Kiss my dark side Valued Senior Member

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    why the hell would any other country put money into fix a problem that the US caused? why should my taxes go to fund a US screw up. Our banks are secure, they are some of the best in the world (though admitedly they are expencive

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    ), we have less than 1% sub prime not the 40% that is the case in the US. Its your problem YOU fix it.

    to the rest of you its nice to see that the ones who will pay the price are still going to be the people who lose there houses. futher more the oil price went up to $120 last night and your suggesting that it will go even higher which will mean MORE morgage defults and more homeless people. Does you goverment even have a plan to deal with the rise in homelessness caused by this???????????

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  9. Xelios We're setting you adrift idiot Registered Senior Member

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    Your typo persists. I'd say $700 billion is pretty bad. The situation would be different if the government was running a surplus this year, but they haven't run a surplus in the last 8 years. It's almost another trillion $ piled onto $9.7 trillion of public debt, and nobody even knows if or when the government will get it back.

    I can understand why it may be necessary, to keep the economy from failing altogether, but calling it a solution is a bit daft in my opinion.
     
  10. iceaura Valued Senior Member

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    30,994
    There was a third factor: desperation.

    The housing bubble this deregulation set up priced people out of the market for rental, for homes, for a place to live. They had no real choice, many of them - especially the first time buyers and so forth, that everyone is dumping on for overreaching.

    Most of the trouble did not come from them, anyway - it came from refinancing to pull equity out of houses for everything from cars to investment properties to - very often - medical expenses. More desperation, often. This refinancing boom (often in ARMs and other dubious products) was heavily marketed from the top down - the executives of these banks and finance institutions are directly culpable, and the deregulation that permitted their behavior was directly responsible.
     
  11. Captain Kremmen All aboard, me Hearties! Valued Senior Member

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    The UK has earned a huge amount over the past 20 years, buying and selling imaginary money. We abandoned our mines and factories and made our money passing round pieces of paper, and packets of data.
    We have done very well from this bubble, and now it's burst we must face a recession.
     
  12. Pandaemoni Valued Senior Member

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    How are adjustable rate mortgages "dubious"? I would grant that HELOCs were trouble,since those often were spent frivolously by the borrowers, but the banks never (to my knowledge) actively encouraged people to buy frivolous things, other than by extending them the credit. It seems to me it's rather like blaming a credit card company for"forcing" it's customers into debt.

    I think you see top down conspiracies where there are none.
     
  13. Captain Kremmen All aboard, me Hearties! Valued Senior Member

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    OK, so Australia has not had its nose in this trough, but most other countries had little piggies running for their share of it. Now that the swill has been turned off, those piggies will get very hungry.
     
  14. Asguard Kiss my dark side Valued Senior Member

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    you dont think we have been hit?
    there are people here who were ready to retire and have lost most of there super in a few months not because we are exposed to the US but because our companies cant access credit which means the companies cant expand.

    the whole world has siezed up, if i was a retire i would be suing the US goverment and wall street for there failure to protect the world from this.

    its your mess, clean it up
     
  15. joepistole Deacon Blues Valued Senior Member

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    It is the mess of our leadership and the likes of Mad and Buffie and others of their ilk. I never voted for bush II. But I like millions of others are paying for the mistakes of George II and his Republican collegues and supporters. Funny the grand architect of this debacle is Bill Graham, McCain's chief economic advisor.
     
    Last edited: Sep 23, 2008
  16. Asguard Kiss my dark side Valued Senior Member

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    i feel for you but i feel more for people like my parents who have seen there super halve. Even goverment investments have gone down though this is less of a problem but the loss of the super funds is a HUGE issue in australia. this combine with the housing crisis and the price of petrol and food is crushing people like my parents who should be looking forward to retiring insted they are being told by the goverment that they will have to keep working for a MIN of 5-10 more years simple to cover there losses and thats only how things stand right NOW, if this keeps heamoroging some of these people, people even like police officers and others who have given everything for the country, might never be able to retire.

    then there is the fact that the loss of super means that the country has to fall back on the aged pention when it should be naturally weaning itself off it now which means the goverment has to make cuts in other area's like health. this doesnt just indirectly impact on me but could directly impact on my sister and i who are both trying to get into the health sector.
     
  17. joepistole Deacon Blues Valued Senior Member

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    I am not familar with the super. But that is why this election is so very important. McCain's chief economic advisor is the architect of this financial mess. McCain does not understand the root cause of the problem. And since he does not understand that his buddy, former senator and lobbyist (Mr. Graham), is the architect of this problem. He is ill equiped to solve it.
     
  18. Asguard Kiss my dark side Valued Senior Member

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    super is a forced investment. Every person gets 9% (i think) of there wages automatically put into a fund that they cant access until they retire. Most of this money is in the stock market here (though some of it is overseas) and it alowed the goverment to wean the country off the aged pention so that this safty net was only used for those who were too poor or couldnt work. It saved the country billons of dollors and it also put a huge amount of capital out there to be invested in the country. in fact there was a proposal before this started that super could be used to fix the shortage of afordable housing. unfortuantly before any goverment decisions could be made the whole stock market crashed and the supper funds were halved. for a while i will admit that they did well to protect there investors from the full extent of the crash (i think to a ratio of around 1:3 which is quite good) but with the total colaps across the board they cant protect them any further. Even the resorce sector which SHOULD still be strong is falling.

    its a compleate disaster which there isnt a huge amount that the regulators and the goverment can actually do anything about. Unless the world starts trusting and starts lending again....

    wether or not you voted for this goverment really doesnt matter, we CANT vote for your goverment and we are being hit.
     
  19. Challenger78 Valued Senior Member

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    Yeah..
    See, we can't stop complaining about Americans because whatever you do, we get fucked.
    I guess my hopes of an isolationist Australia,free to look after its own was kinda naive.
     
  20. CheskiChips Banned Banned

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    Do they have the resources?
     
  21. Asguard Kiss my dark side Valued Senior Member

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    actually we have enough uranium to nuke the whole world

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    problem is we keep selling it to those who really do WANT to nuke the whole world
     
  22. Challenger78 Valued Senior Member

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    Yeah, we should build WMDs, and become a superpower in our own right.

    The REPUBLIC OF AUSTRALIA.. THATS RIGHT!.

    Seriously, Why the fuck aren't we building it ?.
     
  23. S.A.M. uniquely dreadful Valued Senior Member

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    Sell it to India, we'll use it to support our energy requirements.

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