Re: Bailout

[David Farber <dave () farber net>]

Begin forwarded message:

From: "Ronald J Riley \(RJR-com\)" <rjr () rjriley com>
Date: October 5, 2008 8:23:12 PM EDT
To: <dave () farber net>
Subject: RE: [IP] Bailout

"Incidentally, the press has done a dreadful job of reporting what the  
$700G
bailout actually is.  It's not a gift to Wall St, unless Hank Paulson  
acts
unusually stupidly.  It's basically a big bank to buy up those  
unpriceable
mortgages.  The plan is the Treasury buys a whole lot of mortgage  
paper at a
discount in return for cash, so the banks now know how much money they  
have,
then after it becomes possible to figure out what the mortgages are  
worth,
they sell them, quite possibly at a profit."

My concern is that these mortgages will be bought for far more than  
they are
actually worth and we the taxpayers will be shafted once again.

Virtually all the blame for this mess belongs to the idiots in the  
industry.
They did not have to loan money to people who could not afford them.

They bottom line is that we have a glut of houses available and tight
credit.  Few buyers and many sellers.  This is a buyer's market, more so
then anything I have ever seen in my life.

It is my feeling that due to excessive supply, few buyers, inflated book
values and other factors that most foreclosed properties are worth no  
more
than a third of the SEV, which includes deducting the costs of any  
repairs
which may be required from the offer.  That is the reality of today's
market.

Personally, I am really fed up with bail outs for high roller shysters  
and I
think that we really need to put our collective foot down and demand  
that
corporate interests become responsible  and ethical.  Far to many are
neither today.

Ronald J. Riley,


Speaking only on my own behalf.
Affiliations:
President - www.PIAUSA.org - RJR at PIAUSA.org
Executive Director - www.InventorEd.org - RJR at InvEd.org
Senior Fellow - www.patentPolicy.org
President - Alliance for American Innovation
Caretaker of Intellectual Property Creators on behalf of deceased  
founder
Paul Heckel
Washington, DC
Direct (202) 318-1595 - 9 am to 9 pm EST.
-----Original Message-----
From: David Farber [mailto:dave () farber net]
Sent: Sunday, October 05, 2008 7:31 PM
To: ip
Subject: [IP] Bailout



Begin forwarded message:

From: John Levine <johnl () iecc com>
Date: October 5, 2008 6:48:51 PM EDT
To: dave () farber net
Cc: Brett Glass <brett () lariat net>
Subject: Re: [IP] Bailout

> Such a bill would have gone to the source -- bad real estate loans
> foisted upon homeowners by irresponsible lenders -- by doing
> everything possible to prevent the borrowers from having to default,
> thus salvaging as much of the value of those loans as possible. This
> would have helped both ordinary citizens -- by helping them to keep
> their homes and preventing a continuing downward spiral in real estate
> prices -- and the banks who held securities backed by those loans. ...

I'm sorry, but this is way too simplistic and misses some of the key
problems that make the financial situation so tough.  This is not to  
deny
for a moment the greed and excess that went on both in Wall St and in  
banks
in general, but it ain't just foreclosures.

The first key problem is that in a lot of the country, housing prices  
are
still unrealistically high.  Historically, housing prices have tracked  
both
rental prices and incomes pretty closely.  They track rents because
landlords have to pay their carrying costs from the rent they charge,  
and
they track overall income because in a sane market the amount that  
people
can pay for a house is limited by the mortgage payment they can  
afford.  By
these yardsticks, markets like San Diego and Miami are still  
overpriced, and
no matter what we might try to do, they're going to drop until the
fundamentals make sense again.

The second key problem is that there were a lot of irresponsible  
borrowers
to go with the irresponsible lenders.  Some of the people facing  
foreclosure
would be OK if their house were marked down to a realistic price and the
mortgage marked down to match, but the no-documentation loans (NINJA,  
for No
Income, No Job or Assets) generally couldn't afford their houses under  
any
scenario short of an endless bubble.  Somehow we have to figure out  
how to
tell these two groups apart, and treat them differently.  I have no  
interest
in punishing people who got into houses they can't afford, but I'm  
equally
uninterested in providing them permanent subsidies to pay their  
mortgages.

Finally, the problem that the bailout is facing in the short run is not
mortgage default, but bank liquidity.  If banks knew what the houses
underlying their mortgages were worth, and what the incomes of the  
owners
were, they could figure out what the mortgages were worth, and there'd  
be a
market for them.  But since at this point they know neither, there's no
market, banks don't know how much capital they'll have left after it  
shakes
out, and they don't dare make new loans to anyone, no matter how
creditworthy, which is making credit dry up.
This is bad news for the large and small businesses that routinely  
depend on
bank credit.  Try getting a car loan, for example.

So while it's quite true that we need to work on the underlying mortgage
mess, e.g., by allowing banks to rework mortgages where it makes overall
sense, even if the owners of some of the slices of them don't like it,  
and
by authorizing bankruptcy judges to modify mortgages on primary  
residences,
that's less urgent than getting the credit markets working again,  
which is
what last week's bailout does.

Incidentally, the press has done a dreadful job of reporting what the  
$700G
bailout actually is.  It's not a gift to Wall St, unless Hank Paulson  
acts
unusually stupidly.  It's basically a big bank to buy up those  
unpriceable
mortgages.  The plan is the Treasury buys a whole lot of mortgage  
paper at a
discount in return for cash, so the banks now know how much money they  
have,
then after it becomes possible to figure out what the mortgages are  
worth,
they sell them, quite possibly at a profit.  The final cost will be  
way, way
less than $700G, and might even be less than zero.  See, for example,  
this
article by the well informed Bill Gross of Pimco:
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/23/AR2008092302
322.html

Regards,
John Levine, johnl () iecc com, Primary Perpetrator of "The Internet for
Dummies", Information Superhighwayman wanna-be, http://www.johnlevine.com 
,
ex- Mayor "More Wiener schnitzel, please", said Tom, revealingly.




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