We are far enough into his administration that the right can now legitimately talk about “Obama’s failed policies”.

When do we get to talk about “Obama’s regrettably short but thankfully former” Presidency?

Romeo13 on March 13, 2009 at 11:55 AM

Best bet for your money now is to pay down your mortgage.

And under Bammy/San Fran Nanny’s plan, you can also pay your neighbor’s mortgage.

It’s a win-win.

I love the ring of that.

President Obama’s credibility gap keeps growing.

and thanks to all who write intelligently here on this financial issue. i’m learning alot.

So, problem is how do you know how many loans in a “derivative” are underwater, and how many are good investments?

Romeo13 on March 13, 2009 at 11:55 AM

It’s tricky isn’t it. I’m not sure there is a good answer. But to me Karl’s plan seems about as good as any because you force a market. There are investors who will buy these things. Trillions of dollars are sitting on the sidelines looking for a place to invest. If there were a free market in these assets some of that cash would suddenly appear. But investors aren’t willing to pay book value, that much has been established.

Because of the way these things have been chopped, sliced, and diced, I don’t know how anyone with a room of computers could ever value the underlying assets. So it seems to me a potential investor would only pay based on a valuation of the current income stream, which would inevitably mean a significantly lower price than current book value. And that tells me these losses, when they are finally realized, will be massive.

There is no easy way around this mess. The losses are real and someone will eventually take the hit. It looks like it will be American taxpayers.

Obama keeps promising to deal with the actual problem, but weeks after saying a plan was imminent, investors have yet to see anything.

“The insurgent, having no responsibility, is free to use every trick if necessary, he can lie, cheat, exaggerate. He is not obligated to prove; he is judged by what he promises, not what he does.”
~David Galula, “Counterinsurgency Warfare: Theory and Practice”

The property still has value but now it is low.

On second thot, dont do that. Its too nice a day to get bummed out by such things.

Romeo13 on March 13, 2009 at 11:55 AM

I think my home is worth $25k less than I paid, but I’m not underwater on my loan bcause I made a significant down payment. In this environment a $25k equity loss isn’t really worth complaining about. I don’t intend on moving anyway.

Marxist plan for Obama?

I think his idea just might work. I like it better than the government going in now and buying the assets for anywhere current book.

flyfisher on March 13, 2009 at 11:43 AM

Might be a good plan… but one of the things that makes this whole thing tough is folks like me…

I’m not anywhere NEAR underwater on my loan. Nor am I planning on selling anytime soon… and I make my payments on time.

So, problem is how do you know how many loans in a “derivative” are underwater, and how many are good investments?

And how do you track it?

They’ve been selling and buying Debt… whose worth is only as good as the goodwill and intention of the debtor to repay the debt, and the amount of the loan… it really has nothing to do with the value of the collateral of that loan (the house).

Karl Denninger has an intriguing plan. He’s proposed a temporary suspension of MTM combined with a forced sale of 10% of the hard to value assets in order to set a market price.
flyfisher on March 13, 2009 at 11:43 AM

If the forced sale of 10% sets the price, the value won’t be much different than MTM, as MTM is based on selling everything in a fire sale – and in the current market, even 10% moving in forced sales are fire sales. Better to allow a percentage of assets that are illiquid to be marked to model, and the more liquid assets to be marked to market.

They must do something to set a market price for these toxic assets. We don’t need the government agreeing to pay for them at the bank’s book value or WE are certain to get ripped-off. The losses are what they are. We need a free market to establish FMV, then write down the balance sheets accordingly and decide what to do about the losses. The reason they haven’t done it is because they KNOW those assets aren’t worth anywhere near book. The banks are walking dead. Right now they are playing games, delaying the inevitable.

flyfisher on March 13, 2009 at 11:10 AM

What you have described is a Gordian knot that is tying up the world economy. It has to get untied somehow. The free market will not set a value for these assets – if that were possible it would have happened already, and clearly it hasn’t. Nobody has the appetite for risk to make a market in these assets. So they continue to act like a millstone around the neck of the world banking system. The government has to set up a mechanism to get the bad assets off the books of the banks, and the government can’t do that by paying banks for assets that are technically worthless and valued at zero becuse nobody will buy them.

There isn’t a Pareto-optimal solution here. It’s time to bite the bullet and come up with the “least bad” solution. And we will have to live with some imperfect consequences of some aspect of it – i.e. the notion that taxpayers will be “ripped off” if the government “overpays” the banks for the bad assets. One reason nothing has happened so far is the fear of the governmnet officials that they will be accused of selling out to the banks and ripping off the taxpayers.

Romeo13 on March 13, 2009 at 11:26 AM

I understand all too well. I bought my home in 2007. Fortunately I found a seller who really needed to sell, so I paid $50k under appraisal. Even so, I’ve lost money.

Karl Denninger has an intriguing plan. He’s proposed a temporary suspension of MTM combined with a forced sale of 10% of the hard to value assets in order to set a market price. As he said:

This will result in a market being developed over these next six months, if for no other reason than necessity – these instruments will trade by necessity as market participants will have to obtain market prices in order to continue to hold them. By getting rid of the “Level 3″ bucket we will solve two problems at once, while at the same time we recognize that we can’t throw this at people with an instant implementation and we have a “fire sale” problem with these bid lists that has been hitting the asset side of balance sheets, perhaps unfairly so.

I think his idea just might work. I like it better than the government going in now and buying the assets for anywhere current book.

rockmom on March 13, 2009 at 11:33 AM

Good point…

One of the things investors need is to have a stable level playing field.

They can’t make reasonable Risk/Reward calculations if the Government is coming in and changing not only the rules of the game, but dictating winners and loosers as well.

I don’t have numbers, but my gut tells me the only ones holding the market where it is now is the 401K and 403B holders… their money is still primarily in because they are not players, and don’t understand whats going on.

Institutional players, and Fat Cats, are all sitting on the sideline waiting for the bottom… and for the rules of the game to quit changing…

Face it… would you even bother to play a game where the Ref can not only change the rules on a whim, but then say who losses?