Government Bailouts.

[Sebboe]

On the news of saving WaMu, JP Morgan stock is up about 10% today.

There are some companies that are in trouble than can be helped as we've seen with the other buyouts.

I suspect more buyouts will happen but not everyone can be saved.

AIG could not be helped because they insured a bunch of mortgages without actually having the money to cover the policies. They did this because they were greedy, they were unregulated and they were arrogant in their evaluation of the market. It should be noted that AIG was not actually an insurance company, they just happened to insure loans. Go figure.

This is where the domino effect starts.

A bunch of people default on their mortgages. The lenders now have an asset that is worth less than the cost of having it on the balance sheet. They go to collect the insurance and AIG runs out of money meaning everyone is effed except for the person who sold the house (unless they reinvested in the real estate market).

Also, a lot of the problem is that people were approved for loans that had interest only payments for 5 years or low rates for 5 years and then balloon payments. Now that those are coming due and the houses are not worth what they owe on them, they cannot refinance.

I have a hard time feeling bad for these people because twice during the past 6 years I have purchased a house.

Both times I made a modest purchase that I would be able to afford even if there was a downturn in the economy. I also always went for the fixed rate mortgage knowing that I would never have to deal with a suddenly large mortgage payment.

[kestra]

Also, a lot of the problem is that people were approved for loans that had interest only payments for 5 years or low rates for 5 years and then balloon payments. Now that those are coming due and the houses are not worth what they owe on them, they cannot refinance.

I was actually considering this route with an investor, as I don't have 10% to put down. Can this still be an option with a fixed rate? It's definitely a buyer's market up here in Alberta. I don't want to go with a 0% down option, as my hands would to tied with shitty interest rates.

[Blog]

Originally posted by kestra
I was actually considering this route with an investor, as I don't have 10% to put down. Can this still be an option with a fixed rate? It's definitely a buyer's market up here in Alberta. I don't want to go with a 0% down option, as my hands would to tied with shitty interest rates.

Probably a bad idea because there are many associated fees and upfront costs with buying a house that aren't necessarily clear when you start looking for houses, say $4-5k. Additionally, the cheapest houses in my area are bank owned, bank owned are priced ~10% below market, however, they will not take care of things that you could maybe convince a home seller to take care of, like termites, dry rot, etc and not come with appliances so you will need more cash upfront.

[Blog]

Originally posted by Malacasta
If it's going to buy the failed mortgages (which might be what? 100 billion?) then what's the rest of the money for?

If the government could sort out and buy only the bad assets then it might cost only the $100 billion, but they can't, which is why the cost is much higher. Unless they really screw it up, it is reasonable to expect that some of the assets bought will be good.

[Snrrub]

Originally posted by Malacasta
If it's going to buy the failed mortgages (which might be what? 100 billion?) then what's the rest of the money for?

In fact, some of the most basic details, including the $700 billion figure Treasury would use to buy up bad debt, are fuzzy.

"It's not based on any particular data point," a Treasury spokeswoman told Forbes.com Tuesday. "We just wanted to choose a really large number."

Link

[Jyn]

Originally posted by Ilusan
I'm guessing the real question now is, how much are american tax-players willing to lose to keep the system we have in place. Too bad we we really dont have any say in that matter.

Do we want to keep our current system in place, though? I'm no expert, I only know as much about this as the average American, which isn't much, but it seems to me we need a restructuring of sorts.

Also, maybe it is necessary at the moment, but I don't like that all of these failing banks are being bought up buy other banks. It could lead to monopolies, and that doesn't seem like a good idea with banks in particular. If something like this ever happens again, we'd have all our eggs in one basket, so to speak. Then what?

Next, I don't like that the government is stepping in and possibly ending up owning banks through shares. They already control too much of an individual's income through their ability to tax. If they start controlling people's savings, I'm worried about abuse, as the government is wont to do with all such things.

Could anyone with more knowledge on the matter address any of my above concerns? Thanks!

[Fynn]

A bailout is treating the symptom. Treating the symptom without treating the cause isn't fixing, its stupid. Pain's a good teacher and motivator, and if we treat the pain, we'll no longer feel the need to fix the problem.

I was quite upset about the freeze on short selling since that was a lot of what I was doing. I called the housing bubble, and I believed the markets were overvalued so I kept my money out of them for the most part. For the last few years I've watched the market go onto the brink of readjusting itself only to get another puff of air from the Fed to cause it bubble back up. Its springing so many leaks now that the current compressor can't keep up, so they're going to build a bigger compressor in the form of a 700 billion dollar bailout.

The fundamentals of our economy, contrary to Sen. McCain's so eloquently put statement, are not strong, nor are we the worlds largest exporter. Our economy has been based on finantial gimmickry for so long that Wall Street seems to have forgotten that production drives the economy and Washington has forgotten that its the middle class that drives the consumer market. Forgetting these simple facts can lead to a downward spiral. Companies ship jobs overseas, American workers get laid off, American consumers have less purchassing power, sales go down. Companies seeing their sales numbers going south outsources more jobs to keep their profits up, problem gets worse.

We've become completely and utterly obsessed with the short term. When Merrill Lynch lost their billions and decided it was time to fire Stan O'Neal, they still gave him a huge parting bonus for his great performance between 2003-2006. They just couldn't see as a profitable quarter as anything but good, even when the short sighted quarterly profit strategy is what caused the billions of dollars write offs.

Now, with our government allready up to its eyeballs in debt, they want to spend an estimated 700 billion dollars bailing out our finantial institutions for their short sighted bad judgement. I'm glad Democrats and Republicans united in their opposition to the idea of a blank check with no strings attached to Paulson and Bernake. Something has to be done, but we can't do more shoddy patchwork, we need an overhaul.

[Kraxe]

I agree that the bail out in whatever form it arrives will not be a cure. It may make things less painful on teh way down though. the way things were in the financial world last week you, the US and probably most of Europe faced financial armageddon. No more interbank lending and I doubt there would have been any lending to anybody at all. That would bled over to commercial lending of all kinds and you would have seen the entire money market stop working as banks protected themselves by keeping their cash for their own use.

Some form of confidence is required in the banking system, and this bailout may help restore some. Without it, things would be a lot more painful a lot quicker.

it's all well and good to say that a painful lesson is needed, but that painful lesson is going to mean an awful lot of people out of work. And ultimately, not just bankers on Wall Street. Companies all over that depend on a working money market would fold. All walks of life would suddenly be affected, not just the bankers.

[Kraxe]

While it is only another view, I do believe this piece lays out what America (and who knows how much else of the world) has to lose if the deal doesn't go through.

http://www.cnbc.com/id/26906936

[Salimar]

Originally posted by Halyanne
Thanks. I just feel that these companies should have done way more to make sure this didn't happen.

One cannot blame these companies but the lack regulation. If it was not allowed to give away money to insolvent customers, then this wouldn't have happened.

Personally what upsets me is that politicians sell the idea of a liberal market, so liberal that it does not have the necessary regulation to control crazy transactions. While companies are getting profits, everything works fine. When troubles arise, the State covers. Are we socialists in recession and capitalists in growing times? Share debts but not profits?

Of course the government has to pay off if we do not want the financial system to collapse. My point is: more regulation is needed in the first place.