# Force people who made money from sub-prime mess to pay for it **URL:** \ **Category:** Great Debates\ **Created:** [September 22, 2008, 12:18am UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607 "2008-09-22T00:18:09Z")\ **Posts on this page:** 20\ **Page:** 4
**Author:** ![mrcheese](https://avatars.discourse-cdn.com/v4/letter/m/3e96dc/32.png) [@mrcheese](https://boards.straightdope.com/u/mrcheese)\ **Post date:** [September 23, 2008, 11:51am UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/61 "2008-09-23T11:51:47Z")
hang on a sec, i think you’d be going after the wrong people. Government lightly regulated the financial services industry and kept interest rates at artificially low levels for the last few years. People then took on too much risk and were too highly geared to property. So the people who are to blame for the current mess are not the traders/bankers - they didn’t cause the problem - if people had saved some of their money instead of taking out a whacking great mortgage the US & some of western Europe wouldn’t be in the current mess. ---
**Author:** ![Oy](https://avatars.discourse-cdn.com/v4/letter/o/bc8723/32.png) [@Oy](https://boards.straightdope.com/u/Oy)\ **Post date:** [September 23, 2008, 1:43pm UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/62 "2008-09-23T13:43:23Z")
> [@mrcheese](#): > > hang on a sec, i think you’d be going after the wrong people. > > Government lightly regulated the financial services industry and kept interest rates at artificially low levels for the last few years. People then took on too much risk and were too highly geared to property. > > So the people who are to blame for the current mess are not the traders/bankers - they didn’t cause the problem - if people had saved some of their money instead of taking out a whacking great mortgage the US & some of western Europe wouldn’t be in the current mess. So thieves aren’t the problem, it’s the police for not policing carefully enough and the victims for not locking up tightly enough? Oookay. ---
**Author:** ![Hellestal](https://avatars.discourse-cdn.com/v4/letter/h/3ab097/32.png) [@Hellestal](https://boards.straightdope.com/u/Hellestal)\ **Post date:** [September 23, 2008, 1:52pm UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/63 "2008-09-23T13:52:50Z")
> [@Oy](#): > > Will someone explain to me why corporate America gives such huge severence packages? Is it just the golden rule in action - do as you would be done by? We can definitely call it the Golden Rule, considering that the Board of Directors of major corporations predominately have as members the CEOs of other major corporations. They’re treating other CEOs exactly as they want to be treated themselves. Isn’t that interesting? Of course they deserve these golden parachutes. They know _first hand_ just how gosh-durn hard that job really is. The family trees in the corporate world have even fewer branches than the most stereotypical Hillybilly family, and even the fact that these are elected positions doesn’t stop the incest. ---
**Author:** ![mrcheese](https://avatars.discourse-cdn.com/v4/letter/m/3e96dc/32.png) [@mrcheese](https://boards.straightdope.com/u/mrcheese)\ **Post date:** [September 23, 2008, 2:37pm UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/64 "2008-09-23T14:37:10Z")
> [@Oy](#): > > So thieves aren’t the problem, it’s the police for not policing carefully enough and the victims for not locking up tightly enough? Oookay. but i don’t buy that comparison. A homebuyer leveraged more than 3-4x earnings is not a victim, they are the root cause of the problem. Somewhere down the line either they have to be kicked out of the house or the risk(debt) has to be spread across society. We are in this mess because people bought things they could not afford, pure & simple. The police (SEC/Fed etc) let everyone run wild and we’re all going to pay the price. ---
**Author:** ![Whack-a-Mole](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/whack-a-mole/32/141_2.png) [@Whack-a-Mole](https://boards.straightdope.com/u/Whack-a-Mole)\ **Post date:** [September 23, 2008, 3:15pm UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/65 "2008-09-23T15:15:34Z")
> [@IdahoMauleMan](#): > > We could have a very, very long and interesting discussion about why the Panic of 1873, the Great Depression and the S&L Scandal were caused by, or made significantly worse by, government intervention. Not by ‘the free market’. We could even toss in the Panic of 1907 if you want. Huh? You are saying regulation caused these issues? I’d be interested in seeing someone try to make that case. Let’s just try the S&L blowup (bolding mine): > [@](#): > > **Major causes according to United States League of Savings Institutions** > > The following is a detailed summary of the major causes for losses that hurt the savings and loan business in the 1980s:[4] > > 1. Lack of net worth for many institutions as they entered the 1980s, and a **wholly inadequate net worth regulation**. > 2. **Decline in the effectiveness of Regulation Q** in preserving the spread between the cost of money and the rate of return on assets, basically stemming from inflation and the accompanying increase in market interest rates. > 3. Absence of an ability to vary the return on assets with increases in the rate of interest required to be paid for deposits. > 4. Increased competition on the deposit gathering and mortgage origination sides of the business, with a sudden burst of new technology making possible a whole new way of conducting financial institutions generally and the mortgage business specifically. > 5. A rapid increase in investment powers of associations with **passage of the Depository Institutions Deregulation and Monetary Control Act (the Garn-St Germain Act)**, and, more important, through **state legislative enactments in a number of important and rapidly growing states. These introduced new risks and speculative opportunities which were difficult to administer**. In many instances management lacked the ability or experience to evaluate them, or to administer large volumes of nonresidential construction loans. > 6. **Elimination of regulations initially designed to prevent lending excesses and minimize failures**. Regulatory relaxation permitted lending, directly and through participations, in distant loan markets on the promise of high returns. Lenders, however, were not familiar with these distant markets. It also permitted associations to participate extensively in speculative construction activities with builders and developers who had little or no financial stake in the projects. > 7. Fraud and insider transaction abuses were the principal cause for some 20% of savings and loan failures the past three years and a greater percentage of the dollar losses borne by the Federal Savings and Loan Insurance Corporation (FSLIC). > 8. A new type and generation of opportunistic savings and loan executives and owners—some of whom operated in a fraudulent manner — **whose takeover of many institutions was facilitated by a change in FSLIC rules reducing the minimum number of stockholders of an insured association from 400 to one**. > 9. Dereliction of duty on the part of the board of directors of some savings associations. This permitted management to make uncontrolled use of some new operating authority, while directors failed to control expenses and prohibit obvious conflict of interest situations. > 10. A virtual end of inflation in the American economy, together with overbuilding in multifamily, condominium type residences and in commercial real estate in many cities. In addition, real estate values collapsed in the energy states — Texas, Louisiana, Oklahoma particularly due to falling oil prices — and weakness occurred in the mining and agricultural sectors of the economy. > 11. Pressures felt by the management of many associations to restore net worth ratios. Anxious to improve earnings, **they departed from their traditional lending practices into credits and markets involving higher risks, but with which they had little experience.** > 12. **The lack of appropriate, accurate, and effective evaluations of the savings and loan business by public accounting firms, security analysts, and the financial community.** > 13. **Organizational structure and supervisory laws, adequate for policing and controlling the business in the protected environment of the 1960s and 1970s, resulted in fatal delays and indecision in the examination/supervision process in the 1980s.** > 14. **Federal and state examination and supervisory staffs insufficient in number, experience, or ability to deal with the new world of savings and loan operations.** > 15. The inability or unwillingness of the Bank Board and its legal and supervisory staff to deal with problem institutions in a timely manner. Many institutions, which ultimately closed with big losses, were known problem cases for a year or more. **Often, it appeared, political considerations delayed necessary supervisory action.** > > SOURCE: [Savings and loan crisis - Wikipedia](http://en.wikipedia.org/wiki/Savings_and_Loan_crisis#Major_causes_according_to_United_States_League_of_Savings_Institutions) > [@](#): > > I don’t want to speak for you of course, Whack-A-Mole, but I thought you were on that side of the street as well. Weren’t you? I’ll have to go back and check some other threads to make sure. Not sure what you are asking here. Certainly I agree there is blame aplenty to throw around without regard to party. Business and politicians failed us massively. ---
**Author:** ![gonzomax](https://avatars.discourse-cdn.com/v4/letter/g/e8c25b/32.png) [@gonzomax](https://boards.straightdope.com/u/gonzomax)\ **Post date:** [September 23, 2008, 3:23pm UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/66 "2008-09-23T15:23:58Z")
The plan is to reward handsomely those who did the deed. Paulson was at Goldman for 30 years and has a net worth of 700 million dollars. We could take that for the first 10 percent of the new program. He claims he needs the money to save the system. Prove it by kicking in his share. He was a looter and now “trust me” I am now a savior. I do not trust these pricks a bit. ---
**Author:** ![FoieGrasIsEvil](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/foiegrasisevil/32/16638_2.png) [@FoieGrasIsEvil](https://boards.straightdope.com/u/FoieGrasIsEvil)\ **Post date:** [September 23, 2008, 3:34pm UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/67 "2008-09-23T15:34:44Z")
**The Real Culprits In This Meltdown** By INVESTOR’S BUSINESS DAILY | Posted Monday, September 15, 2008 4:20 PM PT Big Government: Barack Obama and Democrats blame the historic financial turmoil on the market. But if it’s dysfunctional, Democrats during the Clinton years are a prime reason for it. Obama in a statement yesterday blamed the shocking new round of subprime-related bankruptcies on the free-market system, and specifically the ‘trickle-down’ economics of the Bush administration, which he tried to gig opponent John McCain for wanting to extend. But it was the Clinton administration, obsessed with multiculturalism, that dictated where mortgage lenders could lend, and originally helped create the market for the high-risk subprime loans now infecting like a retrovirus the balance sheets of many of Wall Street’s most revered institutions. Tough new regulations forced lenders into high-risk areas where they had no choice but to lower lending standards to make the loans that sound business practices had previously guarded against making. It was either that or face stiff government penalties. [_Removed excessive text. Do not quote entire articles, please._] Market failure? Hardly. Once again, this crisis has government’s fingerprints all over it. ---
**Author:** ![FoieGrasIsEvil](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/foiegrasisevil/32/16638_2.png) [@FoieGrasIsEvil](https://boards.straightdope.com/u/FoieGrasIsEvil)\ **Post date:** [September 23, 2008, 3:43pm UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/68 "2008-09-23T15:43:06Z")
Sorry, link: [http://www.ibdeditorials.com/IBDArticles.aspx?id=306370789279709](http://www.ibdeditorials.com/IBDArticles.aspx?id=306370789279709) ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [September 23, 2008, 3:45pm UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/69 "2008-09-23T15:45:58Z")
> [@mrcheese](#): > > but i don’t buy that comparison. A homebuyer leveraged more than 3-4x earnings is not a victim, they are the root cause of the problem. Somewhere down the line either they have to be kicked out of the house or the risk(debt) has to be spread across society. We are in this mess because people bought things they could not afford, pure & simple. > > The police (SEC/Fed etc) let everyone run wild and we’re all going to pay the price. The mortgage lenders incentivized people to make subprime loans even when buyers qualified for more. They also aggressively marketed these loans, both by advertising and by cold calling. Most ads said “bad credit, no problem.” Not to mention that borrowers didn’t hold guns to the heads of these people. Standard banking practice is supposed to be to lend to people with good credit - not to encourage loans without documentation. Not to mention that the number of problem loans is fairly small, about 3%, and few would be a total loss. The real problem is that the clever bankers buried these bad loans in with good loans, so no one knows what the values of the instruments are so no one wants to buy them. Discussion here has moved well past the “evil borrowers” phase. You might want to catch up on the real causes of the crisis. You are right about the Fed though, since some states wanted to regulate lenders and the Fed wouldn’t let them. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [September 23, 2008, 3:47pm UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/70 "2008-09-23T15:47:05Z")
> [@FoieGrasIsEvil](#): > > Sorry, link: [http://www.ibdeditorials.com/IBDArticles.aspx?id=306370789279709](http://www.ibdeditorials.com/IBDArticles.aspx?id=306370789279709) We’ve been through that already. No, stopping redlining is not the cause of the crisis. These guys want to blame everyone but themselves. ---
**Author:** ![MOIDALIZE](https://avatars.discourse-cdn.com/v4/letter/m/e274bd/32.png) [@MOIDALIZE](https://boards.straightdope.com/u/MOIDALIZE)\ **Post date:** [September 23, 2008, 5:22pm UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/71 "2008-09-23T17:22:24Z")
It seems everyone is focused on the housing bubble and the cheap mortgages seemingly given away to anyone who wanted one. But as I understand it, this was only the catalyst that drove the real problem, which is the $45 trillion in credit default swaps being traded that defaulted. If you focus on the credit default swaps, the clear culprit is lax regulation driven by lobbying and a conservative economic philosophy of decreased government oversight. ---
**Author:** ![Oy](https://avatars.discourse-cdn.com/v4/letter/o/bc8723/32.png) [@Oy](https://boards.straightdope.com/u/Oy)\ **Post date:** [September 23, 2008, 7:08pm UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/72 "2008-09-23T19:08:49Z")
> [@MOIDALIZE](#): > > It seems everyone is focused on the housing bubble and the cheap mortgages seemingly given away to anyone who wanted one. But as I understand it, this was only the catalyst that drove the real problem, which is the $45 trillion in credit default swaps being traded that defaulted. If you focus on the credit default swaps, the clear culprit is lax regulation driven by lobbying and a conservative economic philosophy of decreased government oversight. OK, lesson time. What the _hell_ are these credit default swaps I keep hearing about??? And while you’re at it, can you give me the first grader’s version of derivatives (which I assume are not the same ones that I studied over thirty years ago in calculus)? ---
**Author:** ![MOIDALIZE](https://avatars.discourse-cdn.com/v4/letter/m/e274bd/32.png) [@MOIDALIZE](https://boards.straightdope.com/u/MOIDALIZE)\ **Post date:** [September 23, 2008, 9:03pm UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/73 "2008-09-23T21:03:08Z")
> [@Oy](#): > > OK, lesson time. What the _hell_ are these credit default swaps I keep hearing about??? And while you’re at it, can you give me the first grader’s version of derivatives (which I assume are not the same ones that I studied over thirty years ago in calculus)? Derivatives are financial instruments that derive their value from some underlying variable. For example, an option would give you the right to purchase an asset at a particular price at a future date. For example, say Acme Corp. is trading at $25 per share today and the 3 month future price is $35 per share. The cost of the option will basically depend on the market’s view on how likely it is that Acme reaches $35 a share within 3 months. If it’s not considered likely, the option will be priced lower. If you purchased such an option, and in 3 months the value of Acme stock is $40 a share, you can exercise the option at $35, turn around and sell it at the market price of $40, and net a quick profit of $5 per share (this ignores the cost of the option itself, which must be factored in as well). As for credit default swaps, they’re sort of like an insurance policy. Say a bank makes mortgage loans. The borrowers have to pay the bank back, so this represents an asset for the bank. However, there is the risk that a percentage of the borrowers will default. The bank could purchase a credit default swap from another company to cover the risk of borrower default. The bank makes periodic payments to the seller of the swap, and if borrowers default, the seller pays out to the bank. The problem is that these swaps had no regulation and they were not insurance. An insurance company is required to keep a certain amount of reserves available to cover any payouts on the policy it sells. Sellers of credit default swaps had no such requirement. Companies made a killing selling these when the real estate market was booming because there was little risk of default by the borrowers, and because there was no requirement to back the obligation with assets, multiple guarantees could be sold “insuring” a fixed amount of mortgages. Even worse, the swap agreements came to be viewed as assets themselves. Sellers would enter into swap agreements and then sell the rights to receive the payments to investors, even though there was no way of accurately valuing the things. Everything started to unravel when the real estate market went south. The companies issuing the swaps or otherwise guaranteeing payment in the event of borrower default didn’t have the assets on hand to pay out. The large financial institutions that had invested in the swap agreements started to realize that they were worthless, and started to sue the issuers to compel them to put up the necessary assets. There was an article linked yesterday that I’ll try to find, but the value of these swap agreements being traded was anywhere from $45 - $70 trillion. At the low end, this exceeds the value of the U.S. stock market. At the high end, it exceeds the GDP of the entire world. ---
**Author:** ![MOIDALIZE](https://avatars.discourse-cdn.com/v4/letter/m/e274bd/32.png) [@MOIDALIZE](https://boards.straightdope.com/u/MOIDALIZE)\ **Post date:** [September 23, 2008, 9:08pm UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/74 "2008-09-23T21:08:38Z")
Here’s the article: [http://www.dailykos.com/story/2008/9/21/9322/74248/245/602838](http://www.dailykos.com/story/2008/9/21/9322/74248/245/602838) ---
**Author:** ![DoctorJ](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/doctorj/32/2904_2.png) [@DoctorJ](https://boards.straightdope.com/u/DoctorJ)\ **Post date:** [September 23, 2008, 9:24pm UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/75 "2008-09-23T21:24:49Z")
> [@](#): > > There was an article linked yesterday that I’ll try to find, but the value of these swap agreements being traded was anywhere from $45 - $70 trillion. At the low end, this exceeds the value of the U.S. stock market. At the high end, it exceeds the GDP of the entire world. I more or less understand what a credit default swap is, but this is the part I really don’t get–how on Earth could this market be worth so much? $70 trillion is ten times the value of the entire US mortgage market. ---
**Author:** ![gonzomax](https://avatars.discourse-cdn.com/v4/letter/g/e8c25b/32.png) [@gonzomax](https://boards.straightdope.com/u/gonzomax)\ **Post date:** [September 23, 2008, 11:19pm UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/76 "2008-09-23T23:19:19Z")
Carl Icahn was interviewed on TV about finance CEOs. He said they are very likable. They are most likely the head of the frat in college. But absolutely not the sharpest guys . He would like to golf with them but not do business with them. He felt they were absolutely not the most highly qualified people around. Paulson made more than 40 mill a year at Goldman. He has a net worth of over 700 million. Let him give up a half bill to kickstart the drive to save the country. If he believes it is as important as he says, then he and some others who got filthy rich should start the fund off. ---
**Author:** ![SmartAleq](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/smartaleq/32/163_2.png) [@SmartAleq](https://boards.straightdope.com/u/SmartAleq)\ **Post date:** [September 23, 2008, 11:20pm UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/77 "2008-09-23T23:20:13Z")
> [@DoctorJ](#): > > I more or less understand what a credit default swap is, but this is the part I really don’t get–how on Earth could this market be worth so much? $70 trillion is ten times the value of the entire US mortgage market. See, that’s the other neat trick–CDSs are kinda like the mystery bag. They could be fulla dogshit, they could be fulla Krugerrands but there’s no way to tell, really. Let’s say we have this guy who has a bunch of subprime mortgages that we say have a face value of 1 million bucks–ten mortgages of 100,000 each. So as long as the houses really are worth a hundred grand each, we can all agree on the value. But it gets funner–the mortgages are ARMs and have a variable value according to what the prime rate is, so one day someone can make the case that they’re REALLY worth 1.5 million because the interest is up, and convinces someone else to buy the bundle at that price, whee! Then the real estate market goes up so the guy who bought it at 1.5 says “dude, those houses are now worth 150 grand each, plus the higher interest makes this bundle worth 2 million!” and somebody else buys it for that. See our problem here? Something that had a backable value of a million bucks is now considered to be 2 million worth of stuff–now watch the housing bubble pop and the values go down to where the houses are only worth 50 grand each, and the interest rates fall so THAT money is gone and then a whole bunch of defaults happen so the bet they all made that the original mortgages were gonna pay off is gone and suddenly somebody spent two million bucks for a wad of toilet paper and the only thing there is to back it up is ten shitty houses worth a buck eighty five each. See? Mystery bag–buy my bag that I say is very good and maybe you’ll make out or maybe you’ll have a lapful o’dogshit, but no way to tell until you buy it. Since the “values” are arbitrary and are just based on whatever you can con some other sucker into paying, the “value” keeps inflating beyond any sort of reason, but they kept on doing it because nobody wants to be holding the dogshit bag when the music stops. Multiply that by a pantsload, then figure in that those companies that bought shitloads of those derivatives swapped perfectly good real assets for toilet paper and you have a big fucking mess. Now the government wants us to buy those wads of toilet paper at the premium price the fools who have it now bought it for, never mind that it will never be worth even the initial face value unless there’s a fucking miracle. So the government trades good money for used bumwad, Wall Street gets rid of used bumwad in favor of good money, we get stuck with the bill and there’s no guarantee this will even work. If we trade off enough cows for magic beans we’re gonna be fucked and the government will have to print money to keep us from being assraped by high interest loans from other countries who already own our butts. It will NOT be pretty. I’d really rather concentrate on making those bad loans worth more by stabilizing the market on the ground, getting dodgy loans rewritten into something that will keep the foreclosures from happening. Even though most people hate the idea of “helping out the lazy and stupid,” every foreclosure averted is a percentage point added to the value of surrounding houses. A real estate rule of thumb says you can take one percent off the value of your house for every foreclosed property within a mile of you. It stabilizes the real estate market to keep foreclosures to a minimum, and it’s better to fix a bad loan product than it is to buy the derivatives of a whole shitload of bad loan products. The only people hurt by this kind of bottom up relief is the shitbirds who did it in the first place. ---
**Author:** ![IdahoMauleMan](https://avatars.discourse-cdn.com/v4/letter/i/71c47a/32.png) [@IdahoMauleMan](https://boards.straightdope.com/u/IdahoMauleMan)\ **Post date:** [September 23, 2008, 11:40pm UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/78 "2008-09-23T23:40:17Z")
> [@SmartAleq](#): > > See, that’s the other neat trick–CDSs are kinda like the mystery bag. They could be fulla dogshit, they could be fulla Krugerrands but there’s no way to tell, really. > > Let’s say we have this guy who has a bunch of subprime mortgages that we say have a face value of 1 million bucks–ten mortgages of 100,000 each. So as long as the houses really are worth a hundred grand each, we can all agree on the value. > > But it gets funner–the mortgages are ARMs and have a variable value according to what the prime rate is, so one day someone can make the case that they’re REALLY worth 1.5 million because the interest is up, and convinces someone else to buy the bundle at that price, whee! > > Then the real estate market goes up so the guy who bought it at 1.5 says “dude, those houses are now worth 150 grand each, plus the higher interest makes this bundle worth 2 million!” and somebody else buys it for that. > > See our problem here? Something that had a backable value of a million bucks is now considered to be 2 million worth of stuff–now watch the housing bubble pop and the values go down to where the houses are only worth 50 grand each, and the interest rates fall so THAT money is gone and then a whole bunch of defaults happen so the bet they all made that the original mortgages were gonna pay off is gone and suddenly somebody spent two million bucks for a wad of toilet paper and the only thing there is to back it up is ten shitty houses worth a buck eighty five each. > > See? Mystery bag–buy my bag that I say is very good and maybe you’ll make out or maybe you’ll have a lapful o’dogshit, but no way to tell until you buy it. Since the “values” are arbitrary and are just based on whatever you can con some other sucker into paying, the “value” keeps inflating beyond any sort of reason, but they kept on doing it because nobody wants to be holding the dogshit bag when the music stops. Multiply that by a pantsload, then figure in that those companies that bought shitloads of those derivatives swapped perfectly good real assets for toilet paper and you have a big fucking mess. Now the government wants us to buy those wads of toilet paper at the premium price the fools who have it now bought it for, never mind that it will never be worth even the initial face value unless there’s a fucking miracle. So the government trades good money for used bumwad, Wall Street gets rid of used bumwad in favor of good money, we get stuck with the bill and there’s no guarantee this will even work. If we trade off enough cows for magic beans we’re gonna be fucked and the government will have to print money to keep us from being assraped by high interest loans from other countries who already own our butts. It will NOT be pretty. > > I’d really rather concentrate on making those bad loans worth more by stabilizing the market on the ground, getting dodgy loans rewritten into something that will keep the foreclosures from happening. Even though most people hate the idea of “helping out the lazy and stupid,” every foreclosure averted is a percentage point added to the value of surrounding houses. A real estate rule of thumb says you can take one percent off the value of your house for every foreclosed property within a mile of you. It stabilizes the real estate market to keep foreclosures to a minimum, and it’s better to fix a bad loan product than it is to buy the derivatives of a whole shitload of bad loan products. The only people hurt by this kind of bottom up relief is the shitbirds who did it in the first place. Have to admit I’ve only read, and heard, the plan in snippets. But please challenge me on whatever I’ve missed or what I don’t understand. 1. Fed has $700 billion facility to buy mortgage-backed securities in a reverse auction. 2. Meaning, they open up the window and say ‘We’re buying!’. 3. Bank A thinks some homogeneous portfolio on their book, held-to-maturity, is worth 70 cents on the dollar. Bank A asks for 80 cents from the Fed. The Fed says ‘Thanks for the bid, we’ll see what others who have similar portfolios are willing to take.’ 4. Bank B has a similar portfolio and bids 79 cents. Bank C bids 78 cents. Bank D bids 77 cents. 5. Etc., Etc., until a clearing price is found. Call it 70 cents. 6. This is good because the portfolios were trading anyway in a frozen market, and if Bank A, B or C was forced to sell right now it might have only been able to scare up 1 or 2 bids in the 20-30 cent range. Then everyone else would have had to mark-to-market at 20-30 cents. With corresponding impacts on capital requirements. 1. Fed is opening this up to lots of banks, including ‘good banks’ who don’t have to sell, to foster more liquidity and more accurate price discovery. This is the part I’m a little unclear on at the moment. If anybody has more details I would appreciate it. 2. Results: If it’s true market price discovery, $700 billion spent should end up breaking even in the long run anyway, with no loss to taxpayers. Could be a little downside, could be a little upside, depending on how the book performs over time. And maybe if this whole things blows over the Fed could sell the book back into a liquid, open market to get the stuff off their books. Banks unload bad stuff at ‘true’ held-to-maturity market prices, and can get back to bidness. Sounds reasonable in theory, anyway. I missed a bunch of the testimony. I also probably missed a bunch of other details. Any new news? ---
**Author:** ![MOIDALIZE](https://avatars.discourse-cdn.com/v4/letter/m/e274bd/32.png) [@MOIDALIZE](https://boards.straightdope.com/u/MOIDALIZE)\ **Post date:** [September 24, 2008, 12:08am UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/79 "2008-09-24T00:08:20Z")
SmartAleq laid down a shitload of knowledge for us. ---
**Author:** ![gonzomax](https://avatars.discourse-cdn.com/v4/letter/g/e8c25b/32.png) [@gonzomax](https://boards.straightdope.com/u/gonzomax)\ **Post date:** [September 24, 2008, 12:44am UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/80 "2008-09-24T00:44:15Z")
We can not forget that the finance institutions were leveraged at about 30 to 1. They loaned out or bought up spending almost every dime. If things went wrong the had no reserves. Things went wrong. That is bad and reckless management. [Previous page](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607.md?page=3) [Next page](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607.md?page=5)