[lbo-talk] My rescue plan

Jordan Hayes jmhayes at j-o-r-d-a-n.com
Tue Sep 23 17:27:19 PDT 2008


Julio --


> http://juliohuato.wordpress.com/2008/09/23/my-rescue-plan-2/

It's a lovely idea, and it's one that a lot of people have started to try to calculate, but unfortunately it misses one very big problem: fixing the broken mortgages won't fix The Problem. That is: this is not so much a crisis about housing prices or bad mortgages. Yes, the real estate market bubbled; yes, we're on our way down; yes, it was a bigger one than the 'normal' cycles of real estate are used to.

But: the vast majority of the losses involved that took down Bear and Lehman (and to other extent which are being addressed by the Paulson Plan) are not mortgage backed securities (which would be made whole by your plan). CDOs are not backed by the actual mortgages: they are a synthetic instrument that was designed to have cash flows that adhere to and were priced by models that have proved to be false.

If you bought a CDO from Lehman, you are at the back of a very long line of angry people. When you read headlines like these:

http://mailman.lbo-talk.org/lbo/Week-of-Mon-20080915/015340.html http://mailman.lbo-talk.org/lbo/Week-of-Mon-20080915/015307.html http://mailman.lbo-talk.org/lbo/Week-of-Mon-20080915/015266.html

you start to see the magnitude of the problem. This is not a mortgage problem, this is not even a CDO problem, this is a "Everyone lent me money and now I'm broke" problem. You make a good point that many of the mortgages in the various pools will get paid back; and to the extent that the ones in (for instance) Lehman's CDOs pay back, that money will flow to debt holders. But make no mistake: there isn't nearly enough money in those pools to pay back what Lehman owes. They listed debts of over $600B in their filing ... much of it unsecured.

Shag asked for the cartoon version of what happens if the bailout doesn't go through; you can see a miniature version of this in what happened to Fanny & Freddie: people stopped buying their debt, which effectively closed the mortgage window in the US; instead, they demanded to only buy US Treasuries. By taking them over, Fannie & Freddie now *are* US Treasuries, and they immediately began selling their debt again, unfreezing the mortgage market.

If this program doesn't go through, no one will loan anyone in this country a dollar ever again, and the next to be taken over will be BofA, Citi, JPM ... making their debt "Treasuries" ...

"We're all Treasuries now"

/jordan



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