The Patriotic Mortgage Repayment Act of 2008 – If a borrower defaults on a mortgage and the market value of the collateral is insufficient to repay the money borrowed, the Treasury will recover 105% of the residual borrowed but unpaid amount using IRS collection methods and interest schedules. Such a law would prevent the general population from bailing out the speculators that purchased more house than they could reasonably afford. These wannabee flippers took grandma’s life savings out of the bank, now the bank has collapsed and the FDIC is having to pay off grandmas. The least these deadbeats should do is repay 100% of grandmas’ money to the treasury plus 5% as a handling fee.

It should be trivial for the borrower to meet his obligation. After the foreclosure sale recovers 60% of the original loan, the payments on the remaining 40% loss should be well within the budget of even the biggest speculative wannabe flipper real estate genius that bought at the top of the market using grandma’s money.

We can sit here and make up assumptions to justify some pre-determined conclusion. Or we can start from objective facts and evidence, and allow them to lead us to a conclusion.

You don’t know what is going to happen in the future. All your arguments are based on hypothetical scenarios based on highly questionable premises. If you want to just assume that some clever accountant will find a billion dollar loophole, if you just assume that some clever banker will figure out a $10B arbitrage, if you just assume that some clever lawyer will find a way to shake the Treasury down for $10B etc… then anything can be justified. What objective reason do we have to assume any of this?

Twofish: The incompetent one’s aren’t CEO’s anymore.

Once again sweeping assertions unsupported by fact. Last I heard the CEOs of WaMu, Morgan Stanley, Wachovia were all still around..

Part of the issues is that people really don’t want to save money or really care about how much it costs them. They want a human sacrifice and they will get one, not that I’m against it. For that matter most CEO’s aren’t against it since they know that the rules will have lots of holes in them. This isn’t because the congressman are crooked. It’s because to make something watertight you need to spent a year and maybe fifty pages of legislation.

One consequence is that the CEO’s that were competent are the ones that are going to get hit hardest by restrictions on CEO pay. The incompetent one’s aren’t CEO’s anymore.

I’m saying that government guarantees without cash are pointless. If you want a government guarantee with cash, it will cost you about ohhhh $700 billion, which brings us back to the current situation.

The problem with with paying depositors directly through FDIC is that for FDIC to pay out, a bank has to fail. The minor problem is that if you have dozens of banks suddenly fail at once, you freeze the money markets, and this causes spillover affects. The major problem is that if you have a bank fail, then any credit default swaps on that bank will suddenly get triggered and you start having dominoes fall.

Those CDS are really turning into explosive devices, and trying to figure out how to keep them from exploding is really tricky. If you pass legislation that invalidates CDS’s, then all of the people that are holding CDS’s have to mark to market and you might end up with major insurance companies going under.

OK so you pay depositors before the banks fail. At this point, you basically have what Paulson is suggesting.

pseudo: It is not a comparable situation. BSC was at that times being sued by investors in its hedge fund and by others and had potentially huge civil judgement liabilities.

That’s not how securities lawsuits work. Every time there is a corporate restructuring, the lawyers show up and threaten to derail it. It doesn’t matter if they have a good lawsuit or not, throwing the deal into a courtroom will slow things down.

So what will happen is that the lawyer comes in. You ask how much it will cost to drop the suit. They give you a number. If it isn’t too high, you write the check. No one cares what the final ruling of the judge is.

pseudo: The Treasury has no such problems.

Yes they will. Congress is likely to throw out Paulson’s original language and make Treasury’s actions reviewable under the APA standard of “arbitrary and capricious”. Under those standards, any competent administrative law firm can take any decision that Treasury makes, and then have the Court tie up that decision for months. So if the Secretary of Treasury wants to do something quickly, he now has to call up the law firm that is making the lawsuit, ask them how much they want, and if the price isn’t too high, he writes out a check to the law firm to drop the suit.

pseudo: Of course they will need lawyers and accountants to examine assets etc, but why would they be setting money aside for damages which is why JPM needed that $6B.

Because Congress has just changed the law so that law firms will be able to shake down Treasury for cash. That’s how the game is played, and the lawyers just made about a billion. I’ll be very curious to go through the final bill to see how ended up with the real payoffs.

I am not sure what you are getting at. Of course a government guarantee means putting cash on the table. When did I ever suggest otherwise? This discussion started when I suggested that government money could be provided to the FDIC to directly insure depositors instead of to the banks. You claimed that it won’t work because government guarantees were pointless.

Twofish: Anyone the number for one billion for lawyers comes from the fact that JPMorgan set aside $2 billion for the purchase of Bear Stearns and $6 billion for settling lawsuits from the purchase.

It is not a comparable situation. BSC was at that times being sued by investors in its hedge fund and by others and had potentially huge civil judgement liabilities. The Treasury has no such problems. Of course they will need lawyers and accountants to examine assets etc, but why would they be setting money aside for damages which is why JPM needed that $6B.

The guarantees only worked because there was cash on the table. The government guarantee of money markets came out of a $50 billion fund. Freddie and Fannie bailouts came with a cash injection of $1 billion with more to come. AIG came with a $85 billion loan. The trouble with all of this is out of cash, and the FAN/FRE/AIG bailout is just a minor prelude to what is about to happen.

pseudo: Once again you are tossing around big scary numbers without justifying them in any way.

One billion is not a big scary number.

Anyone the number for one billion for lawyers comes from the fact that JPMorgan set aside $2 billion for the purchase of Bear Stearns and $6 billion for settling lawsuits from the purchase.

(senate hearing)

so if bernanke testifies thus, can it be that we are into a phase where the psychology of the situation, and the politics of the situation, move faster than the economic measures can take effect ?

the lending and property boom was fuelled by the economically illiterate – and the unwinding may be no different. the opinions of the ignorant are maturing very fast.

as one of these, i have the view that the $700 billion, now so stunningly big, will turn out to be inadequate in retrospect. bernanke’s grey face tells all. already he sees the economic graduates of 50 years hence specialising in what went wrong in 2008 – the year banks lost faith in banks.

Of course there are far better ways to solve a problem like this, but who would benefit from that?

Funny how the government guarantee of money-markets seems to have had a sizeable effect in calming them. Similarly with the debt of FAN/FRE/AIG as soon as government backing was made explicit.

It is outrageous to claim that government guarantees are pointless. And in offering a guarantee the government most certainly is putting money on the table.

Twofish: Once you have $50 million in the bank, an extra $1 million or $1 billion just doesn’t matter. People in Paulson’s circle care about money only as far as it relates to scorekeeping.

That’s what you’d think. The greed of some of these guys is very irrational and seemingly boundless. Think about how hard they fight to avoid paying taxes.
http://online.wsj.com/article/SB121297088214955885.html

Twofish: For example by making funding decisions reviewable by courts just gave about a billion or two to lawyers. Putting caps on executive pay just gave about $1 billion or so to accountants.

Once again you are tossing around big scary numbers without justifying them in any way.

Twofish: Whatever you do or don’t do, one of Paulson’s friends is going to get rich

Yes I know. The old “Goldman bankers are such amazing geniuses they will always make money” theory. It remains to be seen how smart they are if their cronies at the Treasury are not allowed to rig the rules to favor them.