MSNBC on Bailout: If gov't overpays pays for mortgage-backed securities now, taxpayers pay later

[Amerigo Vespucci]

http://www.msnbc.msn.com/id/26888415/

What could go wrong?

It’s still not clear that an auction system will assign a true value to these securities. Since they’re backed by mortgages, a lot depends on how many more families default on their loans.

This paper is almost certainly worth something: Ultimately it's backed by houses, which have some value. But if the government buys mortgage-backed securities now, and home prices keep falling, it could wind up overpaying, with taxpayers picking up the tab.

There’s another risk. Banks holding these securities have to mark down their value on their books based on market prices. So far, since there is no market for this paper, they had had to guess what it's worth. Some banks have marked the securities down further than others.

If the market price established by the government turns out to be lower than the price banks are using to value their holdings, those banks are going to have write them down further. That would mean another wave of writedowns and losses for a banking industry that’s already on the ropes.

How much is this going to cost me?

No one knows. The plan is for the government to hold on to these mortgage-back securities until the economy and housing market improve, and then sell them — possibly for a profit. Banks that sell their bad debts into this plan may also have to give stock to the Treasury. As the crisis subsides, and banks get back on their feet, that stock could also be a winning investment for the government.