The New Resolution Trust Corp

[tabs]

Simply put the US Government is going to be buying up all those Sub Prime Bonds for PENNYS on the $$$$$. Say $0.25 on the dollar the Financial institutions paid for them. Mind you most of those mortgage holders are STILL paying their mortgages (P+ I). That means there still is cash coming in on those Sub Prime Bonds, they have value. In time those mortgages will be paid off or refied. Thus the government is going to MAKE A PROFIT on those sub Prime bonds.

The problem has been that no one knows the rate of default on anyone of those Sub Prime bonds. No one knows what each one of them is really worth? I t could be $0.10 or $0.875 or even $1.00 on the $$$. Thus if no one knows what they are really worth, no one can price them and if ya can't price them well ya can't sell them. Thus they are essentially worthless from a sales point of view. That is why all these institution s sank, because as they wrote down the bonds they had to come up with more cash to cover. Plus the fact that they borrowed one on top of the other up to 30X on a single bond so that they could have more of them.

[JeremyD]

They can come out ahead by investing in financials then putting a stop on shorting financial stocks....

[tabs]

If the US government didn't come to the rescue their would be NO WORLD ECONOMY...It was all coming unglued and crumbling before our very eyes. If the US govt. did not act today we would be at the start of something far worse than a Great Depression.


Question is has anybody learned a lesson from all this? My answer is a qualified NO they havn't. Just watch our leaders in govt and see how they will continue to spend money they don't have. Eventually the system will fail, as their will be no US govt to ride to the rescue.


Obama is going to be faced with not 47M people without Health Care but 150M people. he should be more concerned with preserving things as they are rather than try to do more. There simply isn't the money to do everything. Those days are now really gone forever. But will he change his rhetoric, if elected will he try and push his agenda of trying to save everyone. This world is like the Titanic there ain't enough lifeboats for everyone.

[widebody911]

Why would anyone want the presidency at this point in time? It's like taking a hand grenade from which someone has just pulled the pin.

[turbo6bar]

The problem ain't bonds. The problem is the debt obligations which happen to be totally worthless. Also, Alt-A and Prime mortgage portfolios are deteriorating. The holders have not set aside enough dollars to cover defaults. The failures are at multiple levels. If it was easy as buying up "bonds" at pennies on the dollar, private money would have already stepped in.

The idea the government is going to profit on this bad debt is laughable. Sure, the government may turn a profit on select pieces of bad debt, but overall, they will incur a great loss which will be passed on via debt to hard working Americans.

Jurgen

[Porsche-O-Phile]

The most distressing part of watching this whole mess unfold over the last 6-7 years (and believe me, I've been saying this was going to happen right from the beginning - it's been like watching an imminent train wreck unfold before your eyes and being powerless to stop it) is the realization that people really ARE that stupid. People really ARE stupid enough to be convinced that there's such things as "endless appreciation" and "risk-free lending" and that an $8-an-hour Wal-Mart cashier "deserves" (and really can afford) a half-million dollar house. People really ARE that stupid to think a 600 square foot glorified apartment in a run-down section of the ghetto with leaky plumbing, rats, lead paint and no parking is worth $400,000. People really ARE that stupid to think that stuff like Option-ARMs and I/O, neg-am loans or 105% financing are actually good ideas. It scares the living hell out of me to know there are THAT many people out there that are THAT stupid where they could literally take us right to the brink of bringing down our entire economic system (and still might). Something that has taken literally decades and gajillions of gigawatts of brain power to build up can be reduced to rubble so quickly in the face of such wanton stupidity.

Now... want to know the thought that REALLY scares me? It's the knowledge that even if we can cobble together a solution with financial chewing gum and baling wire this time and hold the housing sector together, it's the knowledge that all those legions of idiots who created this crisis will learn NOTHING and we'll be right back here in a few years (with a much more perilously fragile economy I suspect) with them doing something on an equally-unprecedented scale of stupidity with some OTHER sector. And the next time, our government might not be able to step in and fix it. Or maybe they just plain won't.

This one scares me (it still might end very, very badly). The thought that the next one is out there looming, ready to manifest the stupid of so many millions in a yet-to-be-revealed apparition scares the living hell out of me. If/when that one comes too soon, we will NOT be in a position to contain or stop it.

Way I see it, we're only prolonging the inevitable. The only real "cure" for this is education and instilling REAL conservative, within-your-means ways of thinking for the masses. That will not happen anytime soon.

Or to put it another way - "never underestimate the destructive power of stupid people in large groups". I hate to be a doomsday prophet, but I think if nothing else, this crisis shows just how screwed we are unless somehow we can (and do) change the underlying way of thinking in this country.

And I seriously doubt we can or will.

[p911dad]

Check out the "Candidate" starring Robert Redford. The end line was, after they won, "what do we do now?" McCain will hit the ground running as he can keep the Bush cabinet and all those thousands of appointees that make the gov't run.(face it, those are the folks that make things work on a daily basis no matter what your hysterical polictics). Most of us have never or ever will heard their names, the faceless civil servants corps) that run the govt. But considering the politics, if Obama wins, he has to start all over, and find and appoint thousands of managers-a daunting task to anyone. Try attracting the best with govt wages. I assume McCain will change out a lot of folks, but he will have a government with all in place. Obama has to start over and find competent folks that are willing to move to DC(ha!). It took Clinton years to fill these posts, Bush had it done in about a year(remember, Bush had both house of Congress when he started). Remember, they all have to be approved by the Congress, which is problematical and subject to raw partisan politics. Obama will be stuck in the mud of Washington, a newbie with ideas but no street cred, McCain the old warrior with a ready made bureaucracy. We are in a crisis of massive proportion. Who wants to take the crap shoot on the newbie?

[HardDrive]

Originally Posted by gmeteer

Who wants to take the crap shoot on the newbie?

Me.

[BeauBlues]

Originally Posted by gmeteer

Who wants to take the crap shoot on the newbie?

Me too.

[jyl]

In the early 1990s, the savings and loan industry was collapsing due to a housing bust. The govt set up the Resolution Trust Corp (RTC) which took over the failed S&Ls and liquidated their assets, mostly real estate and housing, over several years. The RTC-liquidated assets were originally valued at $520BN, the govt utlimately recovered $400BN, for an ultimate cost to the taxpayer of $120BN (all numbers appx).

There are obvious parallels between the early 1990s and today, and the concept of a second RTC is pretty logical. A lot of people who know what is at stake have been calling for this - like former Fed Chairman Paul Volcker, a guy who has plenty of credibility.

Of course, there are some major differences too.

In 20 years the financial system became much more complex and intertwined. Commercial banks, investment banks/securities brokers, and (some) insurance companies are all competing in each others' business. Lenders took more risk, a 10%-down ARM mortgage was racy stuff back then but in 2006 we had 0% stated-income subprime Option ARMs. Securities are more complicated, not merely single mortgages but pools of mortgages divided into tranches and resold to thousands of investors. Institutions are tied together by US $ trillions in derivatives and other counterparty relationships, CDS being just one example. A substantial portion of trading goes on in over-the-counter markets where it is hard to observe. And, finally, the valuation of these complex securities and derivatives, and the institutions that hold them, is more difficult - not just analytically, but small changes in assumptions produce a wide range of outcome (the formulas are non-linear).

The system is bigger, is harder to understand and control, and is sitting on more risk, than it was 20 years ago.

So today's RTC has to be different too. The govt cannot wait until major institutions collapse and then sweep their assets into the RTC, because that one collapse will weaken 1000s of others and at some point the whole thing comes crashing down. Instead, the govt has to step in before the institution collapses, and take the toxic assets into the RTC, exchanged for cash at a discount.

I know lots of you are protesting that "the govt shouldn't bail out companies". One of the Presidential candidates said that today. Honestly, we are beyond worrying about that. The crisis is already bringing down the "real economy", i.e. has spread and is continuing to spread from Wall Street to Main Street. Stabilizing the financial system will mean the difference between a depression and a recession.

I agree that if a company turns to the govt, it should be penalized, by surrendering equity to the govt or by paying a steep interest rate on the cash received. Inflicting pain on management teams and shareholders is fine too, as long as it is workable - remember, without enough management left to run the companies and enough shareholders to provide capital, we've kind of cut off our nose to spite our face.

So, I hope Paulson and Bernanke are able to push a plan through the Congress and the White House. This crisis is big and developing rapidly, these guys are are being aggressive and bold, and seem to be trying to move from the defensive/reactive to the offensive/proactive.

They are not doing a perfect job, the history books will have plenty of criticisms for each of them. But in the here and now, I'm glad we have Paulson who is not a timid guy, and has a better grasp of Wall Street than any Treasury Secretary since Rubin. If either Snow or O'Neill were in the job, we'd be dazedly watching the US financial economy and real economy melt down by now. And thank goodness we have Bernanke, who spent his life studying the mistakes the govt made in the Great Depression, and thus is better prepared than anyone for a crisis where the Fed needs to do more than merely lowering the Fed Funds Rate. Greenspan might be equally capable, but since the crisis developed on his watch he'd be politically ineffective by now.

(Hmm, I wonder if Greenspan proposed Bernanke as his successor for a reason - because he knew what he might be leaving behind? Obviously he knew what Bernanke's strengths are.)

So, we'll see what form the new RTC takes, and if it can be put into effect quickly enough.

[tabs]

Originally Posted by turbo6bar

The problem ain't bonds. The problem is the debt obligations



Jurgen

One day Mother saw a retard falling down the stairs at which she started screaming at me, " How the fk can you push those retards down the stairs, don't you have any feelings for people." To which I said, "I don't have to push the imbeciles down the stairs they do it just fine all by themselves." Now exactly what is a "DEBT OBLIGATION" sounds like a note or bond to me?

All those toxic debts are not all bad, they will take time to work out. The problem is not that they exist but their was no time to let it work out because the financial institutions didn't have the cash to carry them to maturity. And no one exactly knows how to value them.

It seems that the Non Regulatory types were just fine letting the system work itself out but saw that the system was coming unglued and crumbling a little more with every passing hour and development. So they had to step in to reassure the markets that the island of last resort (the govt) was stepping in to rectify the situation. No matter what they do the market is reassured that the US govt the veritable rock of Gibraltar is in the game.

Most foreign govts have seen the abyss open up and probably would be loath to rock the boat at this juncture in time. However and mark my words their patience with Americas spending large has only a limited duration. In 2 years if America does not get its house in order they will stop funding American debt. At that point they will demand a conservator ship of America or they will stop lending money. If they stop lending money then the USA money ain't gona be any good.

[turbo6bar]

OK, so CDOs could be considered bonds. Still, the problem isn't with the securities backed by actual mortgages. The issue is those "bonds" backed by no security (namely mortgages). The riskiest levels are worthless. The lowest tranches were profitable when mortgage default levels were very low. We're well past that point now.

tabdula, mortgage default levels are at record highs across the board (including prime mortgage pools). Analysts state we are only NOW reaching the wave of prime mortgage defaults. We're past the subprime pain. The problem only gets worse as housing depreciation lingers.

[jyl]

jurgen and anyone else who wants to play, how about this:

Give me your guess/estimate/scenario for the following variables, and I'll return an estimate of the total loss for US residential mortgages. Since we can find out how much of each type of mortgage was originated in each year, its not hard to do a back-of-envelope estimate.

Variables (don't get turned off by the length of the list, its just the same question for each year and mortgage pool).
1. For subprime mortgages originated in 2007, (a) percent that will be foreclosed, (b) foreclosure sale price as pct of original selling price.
2. For subprime mortgages originated in 2006, (a) percent that will be foreclosed, (b) foreclosure sale price as pct of original selling price.
3. For subprime mortgages originated in 2005, (a) percent that will be foreclosed, (b) foreclosure sale price as pct of original selling price.
4. For subprime mortgages that existed prior to 2005, (a) percent that will be foreclosed, (b) foreclosure sale price as pct of original selling price.
5. For AltA mortgages originated in 2007, (a) percent that will be foreclosed, (b) foreclosure sale price as pct of original selling price.
6. For AltA mortgages originated in 2006, (a) percent that will be foreclosed, (b) foreclosure sale price as pct of original selling price.
7. For AltA mortgages originated in 2005, (a) percent that will be foreclosed, (b) foreclosure sale price as pct of original selling price.
8. For AltA mortgages that existed prior to 2005, (a) percent that will be foreclosed, (b) foreclosure sale price as pct of original selling price.
9. For prime mortgages originated in 2007, (a) percent that will be foreclosed, (b) foreclosure sale price as pct of original selling price.
10. For prime mortgages originated in 2006, (a) percent that will be foreclosed, (b) foreclosure sale price as pct of original selling price.
11. For prime mortgages originated in 2005, (a) percent that will be foreclosed, (b) foreclosure sale price as pct of original selling price.
12. For prime mortgages that existed prior to 2005, (a) percent that will be foreclosed, (b) foreclosure sale price as pct of original selling price.

[turbo6bar]

I say worst case 5% foreclosure rate and anywhere from 15-25% loss on sale. Don't overlook the expense of foreclosure sale, back taxes, attorney fees, lost interest, etc which are not reflected in foreclosure sale price. The losses can grow dramatically over a short period of time. OK, let's say worst case 40% loss upon foreclosure sale. I'm confident in the foreclosure rate, and possibly overoptimistic (to the low side) in the loss %.

[Hugh R]

In El Aye County they're talking about 33% loss and over 40% in SoCal as a total. Right now, 1/2 of house sales are forced sales in SoCal. LA Times yesterday.

[tabs]

In LV we are looking at at least a 35% to 40% loss from the highs. With the SubPrimes out of the way...which are the weakest link....we have in all probablity have either reached or are at the peak of foreclosures. Only if unemployment really spikes will the foreclousure rate really go through the roof.

[Porsche-O-Phile]

Unemployment is historically a lagging indicator of economic health. That shoe will drop towards the middle/end of 2009.

The 4Q retail numbers for this year are going to be horrendous. Retailers are going to get slaughtered, corporate earnings reports will not look good for 4Q/2009 and you can expect payroll slashing in a major way towards the middle of the year. Which is also when the bulk of ARM resets is supposed to occur, so we're far from out of the woods on this one.

[turbo6bar]

The author at Calculated Risk must have read my posts here, because his latest post is spot on.

Some Thoughts on the Bailout

Select Excerpts:

The underlying problem is that house prices are still too high and no one knows how much further prices will fall. The value of the troubled assets is dependent on future house prices (note: house prices are the key factor for foreclosures and loss severity).

There are private investors willing to buy these troubled assets right now, but the banks do not want to sell at those prices. Why? Some banks believe the assets are worth more than the current bids (it all depends on future house prices, and different banks and investors have different projections). And many banks are unwilling to accept the current bids because the banks would then be insolvent.

Goes back to my point earlier. If this was a slam dunk, private money would have jumped in sooner. It isn't a slam dunk. The debt is very difficult to value. Some issues are truly worthless. Others are worth fractions of original value and some yet are worth 10-30% discount of par. Even then, our valuations are strongly dependent on housing prices/default levels.

I like his suggestion at the end; privatize the losses by infusing capital into the banks. Let the shareholders, investors, and banks eat the dung sandwich. Don't let taxpayers suffer for their sins. However, I'd accept honest efforts to minimize the hit to taxpayers.