Too Big To Fail

Posted by kevin on June 1, 2011 under Foreclosure Blog | Comments are off for this article

Watched the HBO movie then read the WSJ article about home prices sinking to 2002 levels.

When I was an intern at the SEC (about a lifetime ago), my boss told me that the best way to get to the root a securities problem was to follow the money.  That was good advice.

Back to the movie (or book).  the government players concluded that the banks had to be “bailed out”.  But the first thoughts were not about cash infusions into the banks but about  buying the “toxic assets” to get them off the balance sheets of commercial and investment banks. The assets would be put into an entity like RTC from the 90’s and administered.

Why didn’t that happen?  The movie (and book) suggests that it would have been to hard to value the assets.  What assets?  It is not clear.  The average viewer is going to think they are talking about the value of the mortgages.  How is that difficult to value?  Only two factors have to be considered: first, what can the borrower afford to pay, and second, what is the property worth?  If the borrower does not have a job, then we are dealing with the value of the property.  An appraisal takes care of that.  If the borrower has a job, then you have to compare what he or she can afford to pay against the value of the property.  Still not that hard.

If all that was involved were the mortgages, then an RTC solution would have met the need, and we would not be reading about continued slumping home prices in the WSJ.  But, as my old boss said, “you gotta follow the money”.

The real money involved  the side bets that Wall St and the insurance companies were making on the mortgages; i.e., the derivative market.  (cdo’s, swaps, etc)  The amount of money “bet” on whether or not the mortgages would go bad  dwarfed the actual amount due on the loans.  And the real problems were, how to untangle the deals which were largely unregulated and then how to value the derivatives .  This was the action that was going  to put Wall St out of business.

So instead of the economy getting a fix on the bad mortgages, Wall St got a fix with TARP and you and I are still paying for that fix.

Just follow the money.  And see who is left standing.