How are the Feds going to determine which securities to buy?

[napi21]

I posted this in GD but only received one S response, and I'm really trying to understand this mess we're in.

As I understand it, a lender lends $$ to a home buyer, then almost instantly sells the mortgage to someone else. That someone else bundles a lot of mortgages together and sells the bundle as a mtg. backed security on the investment market. And to make matters worse, those same securities can be sold many times. Doesn't that mean that the individual mtg. loses it's identity? What exactly are the Feds planning to buy?

[HamdenRice]

1. The feds are basically "making a market" in mbs

The most important thing to keep in mind is that before the crisis, mbs was considered fungible, interchangeable and almost as safe as cash or treasury bills.

When the subprime crisis hit, suddenly banks realized there were differences, and some were as good as cash and others weren't. That caused the market to freeze up. Then the overall mortgage market crisis occurred and yet more mbs were bad.

One former Treasury official put it this way: if you went into 7-11 knowing that one in one hundred bottle of bottled water had poison in it, but couldn't know which one, would you buy any bottled water?

Of course not.

Right now the banks, have to do thousands of back and forth transactions with each other. In the past, they would use mbs like cash, to do so. Now, most banks won't take other banks' mbs. That has caused a freeze up in interbank transactions.

The mbs that the feds will be buying will be ones banks think are in default and need to do transactions with other banks.

So the govt is going to buy them, go through them, test which ones have poison and resell them as clean.

The way they will know what's in them is that each mbs was created and sold with a document that contains a very, very detailed explanation of what's in them. That document is called a "prospectus." By studying the prospectus, the feds will be able to determine precisely what is in the particular bundle of mortgages that make up the mbs.

[napi21]

2. THANKS! You're the first person to state that the prospectus

actually details the individual mtgs that are in the bundle! All the nitheads on TV, which is the only way most of us get info on this, have been saying they were sold, and bundled, but certainly intimate that nobody knew what was reall in the bundles. I really appreciate your info.

[HamdenRice]

3. To be a bit more accurate

The prospectus describes in detail the kinds of mortgages and mortgage pools used. When the prospectus was filed with the SEC, each company filed it as part of a "registration statement" that includes the prospectus and "exhibits," which are many relevant contracts and documents that also help explain the bundle. The federal government already has this stuff at the SEC, and it is even readily available to the government and general public online.

Finally, I believe it is the trustee of the mbs that has hundreds of pages of spreadsheets and computer printouts detailing the mortgages down to the individual homeowner and their payments and whether they are in default.

So the info is available. It just takes lots of skill and manpower to use that info to evaluate the particular issue of mbs.

[napi21]

4. That makes me question if the Treasury Dept. has the manpower

to handle something this big! I heard a few talking heads this AM saying they MIGHT decide to hire a group outside of gov't to handle this, and it sounds like the only thing they COULD do. We're talking about thousands and thousands of hours of grunt work!

[HamdenRice]

5. That worries me too

Generally, I think Paulson is doing a good job and Bernanke even better. He lost me when he said he wants to hire outsiders. That's outside contractors, and they charge way too much. Paulson hired Morgan Stanley to help with the AIG bailout. Those guys charge thousands per hour!

Better to do what FDR did when he set up the SEC -- hire a bunch of bright young people right out of accounting school and law school into the federal bureaucracy.

[quartz]

6. The topic is a trillion dollars,

using "logic" to say that outside contractors charge way too much is interesting.

Have you heard who those "outsiders" will be?