Holy Profitable Bailouts, Batman!

[xthread]

Wonders will officially never cease.
As of early this morning, AIG (remember them? the people who thought it was a good idea to insure every mortgage-backed security in the country, and promised to make good to the MBS investors if the homeowners didn't pay their mortgages? used to be the largest insurer on the planet) has prepared a plan for paying back the Federal Bank of New York and the US Treasury. We had expected that AIG was going to be one of the two remaining sources of losses in the 2008 federal bailout of the US financial system.

We were wrong. Now both Chrysler and AIG are expecting to return profits to the federal treasury, instead of losses. The dickering now going on between the Fed, the Treasury, and AIG, is about how much money the US Gov't will make on having prevented the world bond market from collapsing. Pretty neat.

Although it does present a problem for Tea Party governance - if we're actually making money on the financial system bailout, stopping that spending won't improve the state of the federal treasury. (As a side note, we've also come out ahead on the Chrysler deal, which is actually more surprising than AIG making money - a bunch of economists were reporting at the time of the AIG bailout that the Feds should make money on it, but should and three bucks will get you a cup of coffee at Starbucks. No one was nearly that optimistic about Chrysler)

Comments

[wrenn.livejournal.com]

Either purposefully missed, or were lead to miss. The very word 'bailout' is not synonymous with 'loan' in any dictionary.

Now, as some one with Ahem-teen years in the finance industry, and in the investment side, I have always spoken of it as a 'loan'. Especially when people shout about 'bailout Main Street' - I counter with 'so, you want a loan you have to payback in the next 2-3 years? How much do you want loaned to you?'

And, yes, you're right, they get confused. Or they tell you that you're wrong.

[cos]

Re "bail out main street" - yes, actually. What I wanted Congress to do was pour some money into stabilizing mortgages and making it possible for people whose payments just unexpectedly jumped just as they lost their jobs, to pay back those mortgages more gradually later on when the jobs came back, while staying in their homes. In other words, a very similar idea to the financial system bailouts.

[xthread.livejournal.com]

How do you imagine the math working on that?
I'm trying to figure out how a hypothetical homeowner could recover from a 30% drop in the value of their home combined with a need to move to find work, because the region they're in now has far too many unemployed in their sector. I can imagine a middle-income homeowner recovering from a 30% drop in putative home value over 10 years, but certainly not in 3. And that presumes more job and wage stability than is probably appropriate.

[cos]

It's a risk. Some people wouldn't be able to save their homes even with help, some would. Some would need to move, some could stay where they were. Regardless of how many eventually succeeded, the failures would've been stretched out over a much longer time, making it easier for the economy to recover.

Chrysler was a much bigger risk, but we did it anyway.

[xthread.livejournal.com]

Erm, let me try that again -
Can you pose a hypothetical someone who your proposal could help?
Please show your math.

[cos]

I find that a very weird question. You doubt that replacing "you just lost your job *and* your mortgage payments are suddenly a lot higher" with "you just lost your job but your payments will be lower for a few years" would help? Economy recovers, many of those people get jobs, and they're better able to make payments from that point on. I don't understand what you find doubtful about this.

[xthread.livejournal.com]

I do - can you plug in a set of numbers where your proposal can actually work?

The assumption set I'm making is:

1. The market value of the home has fallen by 30%
   
2. It is not expected to recover for >10 years
   
3. The family had sufficiently little equity before the collapse that they are now significantly underwater
   
4. There has been a structural collapse in the local / regional employment market. For them to reenter the job market, they will need to take a 30% pay cut, or move to a region of the country that has merely had a cyclic collapse.
   
   In those circumstances, what sort of loan could improve their situation?

[xthread.livejournal.com]

What we're at odds over, by the way, is not whether financial assistance could be helpful, but whether a loan, which they would be expected to repay, could be.

[xthread.livejournal.com]

the failures would've been stretched out over a much longer time, making it easier for the economy to recover

Erm, that only works if the problems are cyclical and not structural - if they're structural, stretching the resolution out over time makes it suck more, not less.

[xthread.livejournal.com]

Chrysler was a much bigger risk, but we did it anyway

Er, really? Buying into Chrysler was purely about downside protection - treat the money as simply gone, as the mechanism whereby a serious industrial collapse of the entire Midwest would be prevented, then be pleasantly surprised that we got any money back. The risk was not do we get the money back, the risk was do we destroy the entire US auto economy - and evaluated that way, I'm comparing the guaranteed destruction of 20% of the economy or so vs. merely the possibility of losing 20% of the economy. Which seems like very simple math to run, not so much a risk calculation per se.

[cos]

I'm obviously not referring to that, because if you judge it by that metric, you also have to judge keeping people in their homes by that metric. We failed to prevent hundreds of thousands of people to be forced to move out of their homes, in many cases with nowhere to go to. The devastation from that was greater than what would've happened if Chrysler had died, yet we let it happen.

[xthread.livejournal.com]

That's precisely the math I'm doing. Letting Chrysler die looks like millions of job losses and evictions, not hundreds of thousands, because of the knock on collapse domino-ing across the Midwest and Upper South

[xthread.livejournal.com]

Also, what population had mortgage payments jump unexpectedly?

[feyandstrange.livejournal.com]

That's gonna depend on how you define "unexpectedly" there, but a lot of people were suckered into getting ARMs who had no idea the rate could shoot up like that.

[xthread.livejournal.com]

Well, and also how you define 'a lot' - if a large but not market-moving number of people were the victims of fraud, or something that looks a lot like it, then we have very different options than if a market-moving number of people were victims of fraud, and so on.

[feyandstrange.livejournal.com]

I would guess that in the subprime markets at least it was a market-moving number; Fannie seems to think so.

(from WIkipedia's Fannie Mae page, more conveinent than digging through us.gov:)

As Daniel Mudd, then President and CEO of Fannie Mae, testified in 2007, instead the agency's underwriting requirements drove business into the arms of the private mortgage industry who marketed aggressive products without regard to future consequences: "We also set conservative underwriting standards for loans we finance to ensure the homebuyers can afford their loans over the long term. We sought to bring the standards we apply to the prime space to the subprime market with our industry partners primarily to expand our services to underserved families.

"Unfortunately, Fannie Mae-quality, safe loans in the subprime market did not become the standard, and the lending market moved away from us. Borrowers were offered a range of loans that layered teaser rates, interest-only, negative amortization and payment options and low-documentation requirements on top of floating-rate loans. In early 2005 we began sounding our concerns about this "layered-risk" lending. For example, Tom Lund, the head of our single-family mortgage business, publicly stated, "One of the things we don't feel good about right now as we look into this marketplace is more homebuyers being put into programs that have more risk. Those products are for more sophisticated buyers. Does it make sense for borrowers to take on risk they may not be aware of? Are we setting them up for failure? As a result, we gave up significant market share to our competitors. "

We don't have solid numbers on predatory lending, partly because "predatory lending" is a poorly defined term, and partly because it's very difficult to prove that I deluded poor old senile Grandma Susan into signing for an outrageous subprime ARM even though she was eligible for prime. But IMO, the fact that the subprime market was predominantly nonwhite, first-timer, low-education-level signers is indicative that the likelihood is strong that those signers had no idea what they'd gotten into. Add in the incentives that lenders were offering their salesforces (bonuses for selling subprime loans etc) and it looks very ugly to me.