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politics

Greed Derivatives

Yes, a lot of people are finding themselves upside-down on their houses right now, but Paulson isn’t proposing we do squat to solve that — and even the “controversial” Democratic counterproposal, that we actually do at least a little something to help those people, after they’ve already gone bankrupt, is pathetically weak. … Taking equity in firms in exchange for taking their crappy, non-marketable products would, yes, seem the absolute least we could do — there must be an upside for the taxpayer in providing this trillion-dollar investment at the expense of ballooning our national debt and crippling public sector works for a decade or more.

Hunter and Devilstower over at Daily Kos make a strong case that the billions involved in the bailout are not for the mortgages, but rather the derivatives from the mortgages.

And that’s where we get that math problem. 1% of all mortgages — the amount now in default — comes out to $111 billion. Triple that, and you’ve got $333 billion. Let’s round that up to $350 billion. So even if we reach the point where three percent of all mortgages are in foreclosure, the total dollars to flat out buy all those mortgages would be half of what the Bush-Paulson-McCain plan calls for.

Then we need to factor in that a purchased mortgage isn’t worth zero. After all, these documents come with property attached. Even with home prices falling and some of the homes lying around unsold, it’s safe to assume that some portion of these values could be recovered. In the S&L crisis, about 70% of asset value was recovered, but let’s say we don’t do that well. Let’s say we hit 50%. Then the real outlay for taxpayers would be around $175 billion.

Which, frankly, is a number that Wall Street should be able to handle without our help. After all, the top firms on Wall Steet payed out $120 billion in bonuses alone between 2000 and 2006. If they’ve got that kind of mad money, why do they need us to step in now? And why do they need twice as much as all the mortgages that are even likely to implode?

[From Daily Kos: What Is This Money Even For?]

No, not the mortgage, the derivatives:

And despite what we’ve been told, then, we can only presume that the problem is in fact not all the bad, scary subprime mortgages. And it’s not. Yes, a lot of people are finding themselves upside-down on their houses right now, but Paulson isn’t proposing we do squat to solve that — and even the “controversial” Democratic counterproposal, that we actually do at least a little something to help those people, after they’ve already gone bankrupt, is pathetically weak.

Instead, we’re getting a Wall Street bailout not of the mortgages, but of the absurd, speculative, economy-wrecking derivatives based on those mortgages, derivatives that investors and banks ravenously sold each other at unsupportable and quite-probably-crooked prices. Those derivatives, generally speaking, are “bets” on the state of the underlying mortgages. And they didn’t just bet wrong — they bet irrationally, based on presumptions of near-zero risks to those underlying mortgages. And worse, the big banks even — bafflingly — got special permission to overleverage themselves 40 to 1, all but assuring collapse if those derivatives went south. Which they did.

The whole bailout (bipartisan or not) still smells fishy to me.

Is that the best approach? I’m not convinced, and I’m more than a little angry at the Democrats for, once again, accepting what they are given and trying to tweak it rather than coming up with true counterproposals. Propping the housing market up from the bottom may be much cheaper than trying to prop up the entire derivatives market from the top, and would seemingly have the same stabilizing market effects. Taking equity in firms in exchange for taking their crappy, non-marketable products would, yes, seem the absolute least we could do — there must be an upside for the taxpayer in providing this trillion-dollar investment at the expense of ballooning our national debt and crippling public sector works for a decade or more. But that’s still weak tea, all things considered.

Not being talked about as much, though, is that we must allow overextended companies to fail. It is an essential part of our economy that economy-threatening recklessness on the part of speculators not be rewarded, and especially not be rewarded by the government. Any actions to stabilize the economy should indeed inject liquidity — but it’s not clear that injecting liquidity through the very companies most in trouble is sustainable or even rational.

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