Maybe simplistic, but someone tell me why this wouldn't work...

[CantGetFooledAgain]

Okay, so Wall Street is in a lot of trouble because of defaults on mortgages. Why doesn't the Federal Government pay the balance due on all of these properties, then put them on the market at reasonable terms, with the defaulting homeowner given first chance to buy back the house?

Why wouldn't this take all of the bad loans and turn them into good loans, thus restoring liquidity to the system?

And although it would be hugely expensive, wouldn't it still be cheaper (and better) than the current proposal?

This isn't my idea, I read it somewhere else, but I'm dying to know why this wouldn't work?

[markbark]

1. Why wouldn't it work?

None of the robber barons would make a dime. You think they'd let THAT happen?

--MAb

[Robbien]

2. The Fed isn't interested in the mortgages. They are buying

investment instruments built on top of mortgages. If the problem was only defaulting mortgages, our system could handle it. But mortgages have been leveraged up at least thirty times over into debt instruments. These are what banks are now calling toxic waste. These are the items the Feds are buying.

The Fed is bailing out the banks. Mortgage status remains unchanged.

[CantGetFooledAgain]

3. Thanks for the response

I guess I just don't understand how this debt can be multiplied like that, and why we are now on the hook for all of it.

Isn't there some law against this? I'm asking in all seriousness.

This situation is surreal.

[Robbien]

6. Well, banks were regulated but are not so much any more and have almost no oversight

Banks can only lever up to thirty times the amount. Investment Brokers and Hedge Funds could lever up as much as they could get away with. On top of all of this are swaps, which are bets made on whether the debt instruments are any good or not. Swaps are amount to hundreds of trillions of dollars. Paulson also wants to buy the swaps.

The other day we bailed out AIG. AIG is a big swap dealer. AIGs insurance business is doing just fine, but AIG is a big player in swaps based on mortgage instruments. This is what we are bailing out here. Bets.

In our deregulated banking/investment system, all this is legal.

[CantGetFooledAgain]

8. All I can say to that is, "holy crap"

[TexasObserver]

4. The problem is the inability of loans to perform as represented to investors.

First, loans were made, often with very poor analysis of the ability of the borrower to pay back the loan, and with an uptick in interest looming some time in the future.

Second, the loans were either sold or packaged for further investment buyers, who bought the rights to the loan cash flows, and who have but do not want to use the rights of default and foreclosure.

Third, the packaging of those loans to investment buyers were "insured" by people like AIG, who got a lot of free money for SAYING they would stand good for the sold packages to the investors.

Fourth, as the borrowers face higher monthly payments and lower real income, they are unable to pay the notes, and the whole house of cards starts tumbling down.

Fifth, as the LOSS becomes apparent, it is passed on until the ultimate responsible entity, such as AIG, has to stand good for the loss.

Sixth, if AIG cannot stand good for those losses, the entire Bush manufactured Wall Stree Ponzi Scheme comes crashing down.

The Bush Solution? Get the US govt. to bail out AIG and to fix the gap between all the bad loans and their real value. This is a scam to save specific financial interests at the costs of all US citizens. This is a time when the bad companies MUST be allowed to FAIL. They should not be saved. Should we have saved Enron?!

[CantGetFooledAgain]

5. "Should we have saved Enron?"

That would make a damn good slogan.

Thanks for the explanation.

[TexasObserver]

7. "SHOULD WE HAVE SAVED ENRON?" is the refrain we should use.

Thanks for your comments.

Think of this: Exxon's profit is about $40 billion a year. Are we to reward AIG for its incompetence by giving them twice that figure? What does that say to the markets? It says you can get more money from racking up losses than from racking up profits.

How can we hope to prevail if we reward bad management and bad investments?

Recall that when American manufacturers were being wiped out, the Wall Street "free marketers" said "let them fail, they're not economically sound."