Archive for September, 2008

• The government was going to purchase mortgages
• The government wants to prevent foreclosure and favours modification of principal/interest rather than foreclosing.

And if a bank still owns it, the bank could easily sell your mortgage to the government as it is a "distressed" asset; and then the government will do stuff like reduce your principal/interest.

No matter how you look at it - it's best for even prime borrowers to default on their loan payments, to take things to the breaking point. That is the kind of moral hazard associated with the bill that failed.

I think if you took out just that one clause - basically, no modifications to mortgage principal or interest will be done - I think the bill will be a better one. A moral hazard introduced at the homeowner level will cause absolute financial chaos.

It's probably moot, because the bill failed. And perhaps that's a good thing because it gives people time to think some more and make changes that aren't purely politically motivated. There are problems with other clauses as well, but the mortgage mod is by far the worst one - and I think that removes most means of really making any profit on the deal.

It's not time to panic. It's time to sit and think about what has just happened. It is not a big deal. It is not worthy enough for an 8% drop on the S&P.

If the Indian markets panic tomorrow I will be seriously considering some purchases.

Fear swept across the financial markets Monday, sending the Dow Jones industrials down as much as 705 points, as the financial bailout package was defeated by the House.

A brochure pitching $1.84 million of notes sold by Lehman Brothers Holdings Inc. in August, a month before the firm filed for bankruptcy, promised "100 percent principal protection."

...

Some of Lehman's structured notes traded last week in the secondary market, mtn-i said in a Sept. 23 report. "Dealers quoted a trading range between 10 cents and 55 cents on the dollar" for the notes, according to the report.

Citigroup will absorb up to $42 billion of losses in the deal, with the FDIC covering any remaining losses, the government agency said Monday. Citigroup also will grant the FDIC $12 billion in preferred stock and warrants.

Citi taking a $42 billion loss (if it happens) - this is huge. It's too big to fail of course, but even with the bailout its capital will need serious replenishing. This is not a lot of fun to watch, but from a trader's point of view it is good.

• $700 billion in two installments, congress can say no if they don't like what happened to the first one.
• Ownership stake in companies that participate. Looks like preferred but even senior to the senior most debt. (first call on assets)
• No golden parachutes, limits on CEO comp
• Huge oversight by Congress, includes putting transaction details online
• Right to modify owned mortgages (this can severely reduce value and "profitability")

Note: A lot of people are saying "it's not a bailout, it's an asset purchase". I respectfully disagree. (Which is the formal way of saying, "Puhleeze.") There is a rescue being mooted, the target of the rescue being current banks. If it was an asset purchase plan, the US could have created a taxpayer owned entity called Mortage Mae or Maggie Mae or whatever, and let it buy everything, funded by T-Bills. And then could have taken it public, sold all of its shares at a hefty price and paid back the t-bills when it made a profit. But that doesn't help the current banks, no? So it's a bailout.

China's cabinet agreed to let investors buy shares on credit and sell borrowed stock to help develop Asia's second-largest market after prices and trading volumes slumped, an official familiar with the plan said.

....

China's action contrasts with regulators in the U.S., Europe and Australia that have banned short selling in the past week to shore up financial shares battered by the global credit squeeze. China's government is betting the changes will boost trading without spurring further declines after state share buybacks helped the CSI 300 Index rebound from a two-year low.