The Bailout Nation Is Alive And Well

Economic bulimia.  Binging and purging.  That’s exactly what our country’s financial markets are ex­periencing.  Over the course of ONE WEEK, we’ve seen the following happen:

Lehman Brothers declares bankruptcy and Merrill Lynch narrowly dodges bankruptcy by being taken over by Bank of America, leaving only 2 of the original 5 major investment banks standing.

pavement pizzaGoldman Sachs and Morgan Stanley (the 2 remaining investment banks) saw their stocks get trashed as our investment community threw the baby out with the bathwater during the mass exodus from fail­ing financials.  As such, Morgan Stanley is now entertaining the idea of a partnership with Wacho­via…who now may also need a lifeline form the government.

And, now it appears that Morgan Stanley and Goldman Sachs are being taken over by Uncle Sam as well.  There goes the entire investment banking community.

In a moment of exceptional restraint and poise, the Federal Reserve opted not to change benchmark interest rates on Tuesday (because, even if they did, little to noting would have changed).

Insurance giant AIG stared failure in the face, only to be bailed out by a taxpayer-backed bridge loan to the tune of 85 billion.

The Treasury agreed to buy twice as many Mortgage-Backed Securities than previously stated (translating to artificially lowered rates in the short-term for you, the mortgage borrower).  They also have offered a broad-base bailout plan for money market funds, guaranteed up to 50 billion (so far) and are offering a housing market bailout whose price-tag has yet to be determined.

In 48 hours time, gold prices both rose then fell by the largest amounts seen in 28 years.

Short sellers (day-traders who tend to exacerbate stock price plunges) have seen increased regulation and forced transparency.  The SEC has gone so far as to ban short-selling on many financial stocks.

A Resolution Trust Corp.-style of entity is being formulated, providing somewhere for the government to dump all their newly acquired terrible assets.

I could go on.  For a while.  But the fact is, we are going through a historic period in our economic evolution.  Absolutely unprecedented stuff.  Banks are failing and consolidating, the government is back-stopping everyone who asks politely enough, and free-market capitalism is withering in the wake of this greed driven calamity.  There is no methodical thinking and hard solutions provided.  No, a go in and cut out the tumor and hope no arteries are hit “operation”.

Our day of reckoning is upon us, kids.  Ironically, 2 months before a presidential election.  We can look forward to incrementally lower interest rates for mortgages and a very beefy set of tax hikes in the next presidential term, regardless of who we elect. 

1 Comment

  1. Greg, thanks for the clear explanation of the current financial mess bail-out. I am still having difficulty understanding how the potential government bail-out will affect the housing market.

    Scenario: a unit in a condo conversion sold for $250K in 2006 (market value back then). The 2008 market value on the same unit is now $150K and comparable units in the complex are current listed at the $150K price…but with no offers/buyers anywhere in sight. The original purchaser defaults on his Alt-I, $0-down, $250K mortgage and the bank (mortgage holder) forecloses on the loan and evicts the purchaser from the unit. The bank attempts to sell the condo unit but cannot find anyone to make a reasonable offer to purchase the unit.

    What I don’t understand: if the bank decides to get this foreclosed condo off their books, will the bank “sell” the condo to the RTC-like agency for the full $250K loan value or the $150K current market value or something like $75K (50% of the current market value)?

    Will the bail-out work like this?: the RTC-like agency acquires the condo unit from the bank for $75K, the bank would recognize a $175K loss on their books because of the bad loan. The RTC-like agency would then sell the condo unit at auction for say $85K to a new buyer who could qualify for a government-backed (FHA, Fannie Mae, Freddie Mac) mortgage…even if the condo conversion complex is chocked full of other foreclosures and mostly investor-owned units. The RTC-like agency makes a quick $10K profit on the deal and the new buyer purchases a condo unit with a $150K market value for $85K.

    Is this realistic? As long as the banks take all the losses and not the government (taxpayers), then I’m all for this bail-out.

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