It seems to me the taxpayers are getting a raw deal in buying up all the bad mortgages. If they pay the banks what the properties are worth today (pennies on the dollar) the banks will be no better off than if they kept the mortgages themselves. But if we pay higher than market value for the properties, the taxpayer will have to wait decades to recover their investment, much less show a profit.
We need to do something so there are not wholesale bank failures that wreck our financial system. But if one bank fails, the economy won’t collapse. And if two banks fail, the result will probably not be chaos either. Somewhere in the middle, there is a just-right number for valuing the properties that lets some banks fail, and the rest go *Ooof!! *, but they survive to build a stronger, more responsible banking system.
My point is, in order to make an example for the future to deter this kind of irresponsible behavior, a not small number of banks need to fail ( the bulk of the depositors would be protected by FDIC). Can we arrive at a valuation of the bad mortgages that would do this, or does the taxpayer have to bend over and take it in the ass and try to save all the banks?
You may well be right in saying that one or two banks failing is not the end of the world, but there are some difficulties in doing this. Fiorst of all, which banks do you save and which do you abbandon? And more important, what do you say to people who loose their money while their taxdollars are used to save the savings of others?
The point here is that the people who have deposited their money in these banks have little to do with what is happening now, it is not their fault the banks are failing. So to have an arbitrary government who save some of the banks (and thus also the people who have savings in those banks) but lets others fail, is in effect arbitrarily giving some citizens a tax return (or bailout) and others not.
By setting the mortgage buy-back rate at level (as yet undetermined) that will allow most banks to survive, but some will find too onerous and they will go broke. For example, McCain’s plan to buy up bad mortgages values them at face value, even if that valuation was inflated unrealistically at the time the loan was made. McCain would generously make the banks whole, while saddling the taxpayer with properties that won’t sell for that value for decades, if ever.
I believe that is wrong, and by devaluing mortgages by region, based on a percentage between then and now property values, some banks will be able to absorb some loss (as they should) and others will simply fail. We let the market decide; no agency has to subjectively choose which banks live or die.
Depositors would be protected by FDIC up to $250,000 (this was raised from $100,000 in the terms of the bailout). Stockholders would lose their investment; they should have known better. By accepting the risks and rewards of investing in the market, it is their responsibility to invest in banks with responsible lending practices. Those who invested in banks that promised high returns based on sub-prime mortgages enabled the bad behavior in the first place, and deserve to lose their investment. Don’t come crying to the taxpayer just because your pyramid scheme collapsed.