Is Congress crazy?

[cos]

Problem: A lot of banks, insurance companies, and other financial institutions are in trouble, and if a bunch of them fail the economy will suffer severely. They're in trouble through a chain of stuff that starts with a lot more mortgages failing than were expected, and a bad housing market. When someone can't make their mortgage payments they may be forced to sell the house, but in a bad housing market, their house may not be worth enough anymore to pay off the mortgage by selling it, so they can't do that. Glossing over a lot of the stuff in between, and ignoring for a moment the legal changes that let this happen, that's basically where the problem begins at the moment, yes?

Now, assuming that we decide that we can't afford to let all these financial institutions fail, and assuming we decide it's worth spending several hundred billion dollars on it right now - rather than argue the merit of those two points, let's take them as a given - assuming all of that... why would Congress even consider using that money to bail out the financial institutions directly?????

We could take the same money and spend it on bailing out homeowners who can't make their mortgage payments.

We could get more bang for the buck at first pass because we wouldn't have to buy all of the "bad" debt, only enough to make it possible for each homeowner to keep on paying, perhaps with lower payments over a longer period of time. Banks would be stronger simply because all this debt would no longer be poised to fail, and confidence in the banks would recover as soon as the plan was passed, even before actual homeownwers were bailed out, because people would know that a lot of these loans would no longer fail completely, because they'd qualify for the bailout plan. Not only would we save banks, but we'd save jobs, neighborhoods, and families. By preventing mass dislocation of people we'd be saving lots of other pieces of the economy at no extra cost.

I've heard some arguments against the "moral hazard" of bailing out people who took risks that didn't work out... every single one of those arguments applies to a much greater extent to bailing out financial institutions who took vast amounts of irresponsible risk, who risked not just themselves but everyone around them, who were paid to understand finance and to know better than to do this, who lobbied for laws to make it easier for them to do this...

In what bizarre reality does it make any sense to even consider bailing out the financial institutions instead of the homeowners in trouble?

I'm going to call my members of the House and Senate and I hope you call yours.

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Comments

[tisiphone.livejournal.com]

So very, very much agreement (not to mention that argument shows a shocking lack of understanding of the argument of moral hazard - no one in foreclosure today expected any government bailout at all on their loans, why would they? Moral hazard very much does not apply here.) The root of the problem is bad mortgage debt. Fix some of the bad mortgage debt, don't just swallow it up in government coffers.

[msmidge.livejournal.com]

Thank you. It is helpful to have some alternative arguments to "well, we have to give Wall Street all our money!"

[athanasius.livejournal.com]

"We could get more bank for the buck"

Deliberate or a thinko?

One possible answer is that the administrative costs of giving a large number of people money to pay their mortgages (even if done by giving the money to the banks on their behalf) is likely going to be hugely greater than just bailing out the financial institutions. The latter is likely a lot quicker as well.

[mrf-arch.livejournal.com]

One possible answer is that the administrative costs of giving a large number of people money to pay their mortgages (even if done by giving the money to the banks on their behalf) is likely going to be hugely greater than just bailing out the financial institutions. The latter is likely a lot quicker as well.

Yup. The number of affected banks is trivial compared to the number of mortgages outstanding right now that would have to be audited to see if the mortgage holder deserved an individual bailout or not.

[cos]

On the other hand, when bailing out someone who wants to stay in their home, you only need to apply enough money to make it possible for them to do so, which is almost always going to be much much less than the whole amount.

[cos]

(fixed, thanks) When my fingers get used to typing a certain letter combination a lot, they get to doing it automatically.

[annodomini.livejournal.com]

The other thing I don't get is why, even if we are bailing out Wall St, we would give a $700 billion blank check to one organization, with accountability strictly forbidden ("Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.") This seems like a perfect recipe for unbridled corruption.

Oh, and just one question on your question: is it the case that we could actually rescue anything by bailing out the homeowners? Lots of them have been foreclosed already, so there are lots of houses sitting around empty and losing value rapidly, that the banks need to get some sort of value out of or they'll lose even more money. Would a homeowner bailout be too late at this point? I don't actually know, I'm just curious.

[cos]

It's not a recipe so much as it is unbridled corruption.

Bankers figure out they could take more risks and make more profits if they get some laws change, so they lobby to change the laws, and take lots and lots of risk and make huge profits. Risks fail and now they're in trouble, so they go back to the government and get the money. They got to keep the profits, of course - those are long spent or invested in other things, or paid to individuals.

A homeowner bailout would make the value of existing mortgages more certain. That would definitely be enough to stave off this financial meltdown. It wouldn't save banks from the stuff they've already lost, but nobody's talking about doing that anyway AFAIK. If they are, that's even crazier.

[mrf-arch.livejournal.com]

A homeowner bailout would make the value of existing mortgages more certain.

The "value" of the existing mortgages is already known. It's the value of the mortgage-backed securities that's at issue. Of course, if you can guarantee there'll be no defaults, you can probably guarantee the total value of the mortgage-backed securities too, but the scope for abuse there is mind-boggling.

[mrf-arch.livejournal.com]

Now, assuming that we decide that we can't afford to let all these financial institutions fail, and assuming we decide it's worth spending several hundred billion dollars on it right now - rather than argue the merit of those two points, let's take them as a given - assuming all of that... why would Congress even consider using that money to bail out the financial institutions directly?????

First, let's understand the terms: The plan would allow the Treasury to buy up mortgage-related assets from American based companies and foreign firms with a big exposure to these illiquid assets. The aim is for the government to buy the securities at a discount, hold onto them and then sell them for a profit.

So, in effect, the government would be swapping T-bills (or the like) which are a known value for these mortgage backed securities of questionable pedigree, (which right now are not able to be sold for love or money) and then sitting on the latter until they can be sold. Or possibly until they expire, since I think the CDO basically runs out of life when all the underlying mortgages are paid off.

This is a better potential bet for the taxpayers, since if I give money to every homeowner, 100% of that money is basically gone from government coffers, not to return. If I buy the mortgage backed securities, to whatever extent the underlying mortgages don't fail, I retain value. And, in the latter scenario, I've also added some liquidty back into a banking system that won;t function without it. In the former, I haven't, since giving a bunch of homeowners cash does jack for setting a solid market value on mortgage-backed securities, even assuming the homeowners use the money to pay off mortgage debt.

As you yourself point out, there's a moral hazard issue, too - why do I want to reward people who signed for a mortgage they couldn't pay, again?

[cos]

You can "give" a lot less money to homeowners than the value lost in the securities, because they will want to keep making payments they can afford in order to stay in their houses.

Now, why would I want to reward companies and executives that irresponsibly made huge amounts of bad transactions when they were supposed to be the ones who knew better, and put not only their companies but all the rest of us at risk? Talk about moral hazard.

[mrf-arch.livejournal.com]

You can "give" a lot less money to homeowners than the value lost in the securities, because they will want to keep making payments they can afford in order to stay in their houses.

They will? How many of the threatened homes are owner-occupied right now? How many people would take the money and run, particularly given the falling market? How does a lump sum payment help with future unaffordable payments, or are we arbitrarily re-writing the terms of everyone's mortgage while we're at it?

Now, why would I want to reward companies and executives that irresponsibly made huge amounts of bad transactions when they were supposed to be the ones who knew better, and put not only their companies but all the rest of us at risk?

Companies have no personality, no humanity, and no conscience. "Punishing" a company is a convenient fiction - it means nothing and all that happens is that the costs of the "punishment" move down the line to shareholders and customers. As for punishing individual responsible actors, I'm all for it, and I think crouchback's suggestion of a decimation for the senior management of the investment banking sector would be a lovely idea. But it's a complete aside to fixing the problem, and conflating the two things isn't helping your thinking.

[mangosteen]

As you yourself point out, there's a moral hazard issue, too - why do I want to reward people who signed for a mortgage they couldn't pay, again?

Are you talking about people who a priori knew that they wouldn't be able to afford their house, but wanted the thrill of buying something large?

Are you talking about people who were responsible, knew their limits, and made their payments on time every month, but $BADTHING happened, and now they can't move or sell, while getting hit with an adjustment they never thought they'd have to face (due to moving before then)?

I think that there are remarkably few of the former, and a whole bunch of the latter.

Using the power of 20/20 hindsight to retcon people into being deadbeats doesn't sound like "moral hazard" to me.

middle ground

[cos]

I think the larger group is in the middle: People who didn't really know they might have trouble with this mortgage in the future. It seemed like a house purchase that made sense at the time, and then circumstances changed; or, they thought if they got in trouble they could sell the house, but surprisingly their house is now actually worth less than when they bought it, something a lot of people didn't realize was possible.

One big difference between homebuyers, as a group, and bankers, is that homebuyers aren't expected to know finances and markets to nearly the same extent, and are much more at risk of making what turn out to be bad decisions, completely in good faith.

I agree that your second group (bad thing happened) is much larger than your first group (people knowingly taking on bad risk), but I think my middle group is the largest.

[mrf-arch.livejournal.com]

Are you talking about people who a priori knew that they wouldn't be able to afford their house, but wanted the thrill of buying something large

Not to mention people who a priori knew nothing, because they didn't, couldn't, or wouldn't read the fine print. Again, to the extent that there's an issue of predatory lending practices, there's a need for individual punishment of individual bad lenders, but that's also an aside to fixing the problem.

Are you talking about people who were responsible, knew their limits, and made their payments on time every month, but $BADTHING happened, and now they can't move or sell, while getting hit with an adjustment they never thought they'd have to face (due to moving before then)?

And have we historically ever bailed those people out? Traditionally, "I did my best planning but something went wrong" is what bankruptcy is for.

[johnromkey.livejournal.com]

If the financial system is on the brink of collapse then you may prefer to blow $700 billion rather than allow the collapse. If the investment banking system entirely collapses it doesn't just take itself down the drain. It takes your 401K's with it. It takes pension plans with it. It takes investments by towns with it. It takes the ability of many non-financial businesses to simply do business with it.

Doing a bail-out may allow pieces of the system to fail slowly rather than dramatically. If they fail in a slow, controlled manner then they won't have to depress the assets of the rest of the system. Morgan-Stanley and Goldman-Sachs were both profitable and solid companies. They beat earnings estimates in the most recent quarter. Their stock, however, is down over 30% as a result of the failure of other large investment houses (Lehman Brothers). As you take apart Lehman Brothers, if you flood the market with their assets you depress the value of other investment firms and you can put firms which are still able to operate out of business in the process. If that happens you may be looking at the collapse of the entire sector.

I think that's something you want to avoid.

I am not saying that I believe the government's plan is a good plan. I don't know enough about it to have an opinion. I don't know enough in general to really formulate a useful opinion even given the details. And I don't think enough details of the plan are even solidified yet to say.

Try to rescue the system, punish the people who are responsible for its failure, not just limited to the people running the organizations but the people in government who let it happen as well, like the people at the SEC who decided it was acceptable to waive regulations that would have not allowed the major investment firms to take on too much risk. If not rescue, at least attempt to put it to rest in a controlled manner.

The consequences of the system failing are a lot more dire than the individual businesses involved collapsing.

[cos]

Sure, I accept as axioms in this post that:
1 - we need to prevent the collapse
2 - it is worth spending $700 billion from the government's general fund to do so.

These points can be debated, but I'm not debating them here, I'm accepting them as starting points.

[barking-iguana.livejournal.com]

First, I'm at work and haven't had time to read all the responses. If anyone's already covered the gourns I will, I apologize.

The problem isn't martgages that have already defaulted, it's securities that have been bundled in such a way that the issuers will default at some time in the future, as some fraction of the underlying mortgages do default.

So I don't see how to accomplish what you want without eitehr guaranteeing the mortgage-backed securites (which is helping the debt-writers, not the home-owners) of guaranteeing in advance that home-buyers who degfault on their mortgages will have the tab picked up by the government so they can stay in their homes.

As bad of a moral hazard any other option is, I think telling home-buyers that there's no future consequence for not paying loans they currently have outstanding is a much more extreme invitiation to bad behavior.

Perhaps the govenment could pick up the mortgages and take ownership of the homes, grant the defaulting home-buyers a long-term lease, and sell the properties to an organization more suited to being a landlord.

[cos]

You're right on the first part: the problem is mainly that nobody knows how many mortgages will fail and how many of them will turn out to be on houses that aren't worth enough.

What the government needs to do is pass a plan that clearly makes it much more likely that mortgages will not fail. It doesn't have to "guarantee in advance that buyers who default will have the tab picked up" - that's a pretty stupid strategy. Rather, it needs to put in place a plan that makes it possible for homeowners who are in danger of defaulting, to readjust in such a way that they can continue paying without failing. That would cost the government some money, but nowhere near the full cost of a default.

Furthermore, the money doesn't actually have to be spent right now: As long as a sensible plan is in place, the financial industry can look at it and say "aha, now we can predict that a much smaller percentage of these mortgages will fail, therefore we can recalculate the value of these mortgage-backed securities and be confident in that value, therefore companies that hold credit default swaps insuring those securities have a more measurable liability and we can see that some of them are going to survive ... " etc. Basically a cascading effect, starting from the root, and flowing through the entire industry, stabilizing it, based on the expectation that a lot of now-uncertain mortgages will survive, perhaps with some loss, but not as much as the risk they now seem to be.

Regarding the hazard:

1. It can be made to apply only to loans already existing at time of passage, which would address the current crisis without affecting people's future home-buying behavior, and could be coupled with re-regulating mortgages to prevent massive bad risktaking by banks in the future.

2. Whatever the government does to stabilize troubled mortgages to allow homeowners to stay, can still have "consequences". Government may gain some of the equity in their home; their mortgage terms may be extended to a longer horizon; in some cases if the government's loss is high enough the homeowner might have to file bankruptcy and lose access to credit for a time (as well as loss of face, which is significant to people). Economically, though, we're better off if people get to stay in their homes, and if mortgages now seen as having uncertain value gain a more quantifiable and higher value to the industry.

[lil-brown-bat.livejournal.com]

Now, assuming that we decide that we can't afford to let all these financial institutions fail, and assuming we decide it's worth spending several hundred billion dollars on it right now - rather than argue the merit of those two points, let's take them as a given - assuming all of that... why would Congress even consider using that money to bail out the financial institutions directly?????

Mercy's sake, you don't really need to ask that question, do you? We've had a kleptocratic, carpetbagger government in power for eight years. They've been utterly shameless in their use of their power to line their own pockets and the pockets of their cronies and ass-lickers. Why, when the opportunity presents itself, would they not choose the option that channels still more rewards to the wealthy?

You know that you and I have disagreed violently in the past about whether the answer to this country's real problems lie in a policy solution (and I ain't no libertarian, god forbid). In cases like this, though, where the people are being coerced to contribute to a policy solution whether they want one or not, we've got an obligation to bitch up a storm about the form that that policy solution takes. In fact, I tried to do just that thing a week ago when the AIG bullshit went down, only to find invalid email addresses for both John Kerry and John Olver. Perhaps your links will work better.

[cos]

I've been calling on the phone, because I think it's more effective than emailing. When I call I can actually speak to the legislative aide working on the issue, and have a real conversation, if I'm conversational about it.

[japlady.livejournal.com]

I heard something the other day that a large chunk of the failed mortgages are NOT folks who live in their homes, but folks who were buying up houses intending to flip them. Should they be covered?

[cos]

I think that to the extent that stabilizing mortgages for people who live there is not enough to stabilize mortgage-backed securities, other things need to also be done. But keeping people in their homes should be the starting point, rather than the afterthought.

[cos]

If you look at it from a moral, "want to puke" point of view:
There are homeowners who "shouldn't" be bailed out.
There are bank/brokerage/etc. executives & stockholders who "shouldn't" be bailed out.

Percentagewise, the extreme "shouldn't be" bailed out set, by this standard, is much higher in the latter set than in the former.

Furthermore, by the same moral standard, there are those in both sets who *should* be bailed out.

I suspect that in the former set (homeowners), that "should" set is pretty large, and possible even a majority. In the latter set, it's vanishingly small. Most of those who aren't in the "shouldn't" set are in a middle ground: people who bought some stock, knowing it might fail, and able to accept the consequences.