Note to Paulson: The Key to Passing the $700 Billion Bailout Is Insurance

Valuation

Poor underwriting (often encouraged by misguided government policies) and securitization of bad assets got this ball rolling.

Whatever bailout plan is adopted, the first key to its efficacy will be using an honest method to value assets purchased or insured. Contracting ACORN to assist in this enterprise would not be a good idea.

Who pays the insuranced premium?

Barone says:

"Premiums would be determined by the rates of foreclosure on each class of securities so far. Under this plan, the government would be taking in money, not paying it out. Of course, if the premiums are not enough to cover losses, the government might eventually take losses, as it did when the savings and loan industry collapsed."

So... what should the premium be? Wouldn't this require the same difficult analysis necessary to set a price on the MBS to facilitate the Paulson plan? Barone mentions default rate as THE parameter to determine the rate, but what about counterparty insurance? Etc. Even the "default rate"; this is simply an known entity that one drops into a simply premium formula? Somehow I suspect it is quite dynamic and shaped by a number of interacting forces.

Under the Barone plan if the premiums equal the losses then the government breaks even. But of course having any idea what the losses might be is what has frozen the credit market. Again, my point is that if you cannot accurately estimate the likely losses you cannot set an appropriate premium. Set it too high and you hinder capitalization of the firm, set it too low and the government takes a bath.

"Insurance" = Credit Default Swap

There is a name for an insurance product that promises to pay the holder of a debt instrument if the borrower defaults. It is called a "credit default swap" and it is what caused a lot of the massive losses at some of the investment banks that recently collapsed or are struggling to survive. If the government becomes a credit default swap dealer, it will create a huge potential liability for the government with little potential upside. Just buying the mortgages (as Treasury suggests) is a smarter deal. That way government gets the upside if the mortgages pay out and the downside is less intense if the mortgages perform worse than expected. Credit default swaps and other derivative financial instruments magnify small fluctuations in financial performance tremendously, which is what makes them so risky.

By the way, I agree with Mr. Buziak. We need to get rid of mark-to-market for all capital adequacy regulations, or at least for debt securities that are traded in markets where most of the market participants are regulated financial institutions. When the price goes down a little, the institutions have to revalue their balance sheets, which requires them to sell assets to get back into compliance with their capital adequacy requirements. The sudden glut of sellers causes the market price to drop sharply, triggering another round of revaluation, triggering another round of selling, and so on, ad infinitum. This is the biggest problem facing Wall Street. (The second-biggest is Sarbanes-Oxley, but that is another story.)

here's your better deal

If Japan had bailed their banks out early instead of late, their recession wouldn't have lasted as long.

But you know what, your right. Pelosi and Reid should say, "This is Paulson and the president's plan, not ours. We're going home. The American people don't want it."

In three weeks, when their retirement savings had fallen by 40 percent, the American people would have a lot different opinion. When the banks notified them that their credit card limit had just been reduced to whatever their current borrowing is, they'd have a lot different opinion. When Lowe's and Home Depot laid off half their work force, and general contractors began declaring bankruptcy, they'd change their opinion. When the FDIC announced that it could cover deposits and needed a bailout, they'd change their position. When gas rose to $6 a gallon because the dollar was so weak, they'd change their opinion.

So go home Nancy. Go home Harry. Let the Republicans enjoy their ruin.

McCain should hold out for a better deal

If McCain is smart, he will oppose all efforts by Bush and the democrats to pass the Paulson bailout version of the deal.

The conservative republicans in congress are the only people who have a clue so far. The insurance bailout would be acceptable, but ONLY if it doesn't include the Paulson purchase bailout.

The polls show overwhelming opposition to the Bush/Paulson/Obama plan. McCain can win the election on this issue, but only if he plays his cards right. The fact is, the country is sliding into a recession no matter what happens. Bailing out the big banks will cause a prolonged recession similar to what happended in Japan in the 1990's.

Insurance riskier

Mark Zandi - Moody's

"Seems to me it doesn't address the fundamental problem that there is no market for these securities. How can you write insurance on these securities unless you know the risks you are taking and you can't know that unless you have a market. Reminds of that pink floyd song. Anyway, this is a much less effective way of addressing the problem and would very likely cost taxpayers more than the tarp. Perhaps most importantly most immediately is that since it is not clear how and if it will work it won't stabilize financial markets."

Lou Pizante, a veteran of the mortgage-securitization business who now runs Mavent, a maker of compliance software for mortgage lenders. He points out the only way for the Cantor plan to work actuarily was for every last one of those $6 trillion in mortgage securities to be insured. Otherwise you'd just get the financial institutions with the crappiest loans on their books choosing to participate--which would amount to a giant bailout of the bad guys by taxpayers. So I'm not sure how you could do a blended plan of insurance and purchases, since you've got to insure everybody.

TAKE A LOOK AT THIS VIDEO!!!

http://www.youtube.com/watch?v=H5tZc8oH--o&e

What if the $700 Billion Bailout turns into $5 Trillion?

http://www.breitbart.tv/?p=182363

Please see this video that insists our $700 Billion Bailout will turn into $5 Trillion dollar loss for the citizens of America. Viewers need to know the truth and our elected officials are so corrupt that they only think of the few

Insurance vs. purchases

I think an added goal of the Paulsen plan was to provide much needed liquidity into the banking system. Banks have been hoarding cash because they have no idea what the depth of their liability is relative to the mortgages that they hold. Under Paulsen's plan, the government clears the market of the toxic assets while injecting cash into the system to spur lending activity. The WSJ had an even better idea: buy the assets but take a preferred equity position in the company selling the assets. That way if the government overpays for the asset, the overpayment would be a wash because it would be secured dollar for dollar in the equity of the company. Because it is preferred, the taxpayers get paid back first and at an increased price if the stock went up in value. Forget the insurance option. There are better ways to protect the tax payers while actually solving the credit crisis.

Wrong again

As usual, Barone loves the position taken by the ultra conservative wing of the Republican House members. A lot smarter people than the guys who drafted the insurance idea (and Barone for that matter) have said that it will not work.

It would be nice if John Boehner, Mike Pence, and all the other blow-hards in the House would come up with a serious alternative instead of blowing smoke.