This certainly has been a week for the record books. As another blogger said, "Our grandchildren will read about this week." While they may be reading, I hope it's not too much because they had better be working to pay off the debt this generation will be leaving them. By the end of this year, this country will be $12 TRILLION in debt. That's $40,000 for each man, woman and child in this country. Over $1,000 per year of each person's taxes will go just to pay the interest.
It's bad enough that we will be so far in debt, but the rhetoric this week of "mark to maturity", "this is another RTC and look how successful that was" and the really good one, "the government can be a patient investor awaiting his profits." All this is just so much crap.
Face it, the "plan" proposed by Bush, Paulson and Bernake is incredibly expensive. We are being asked to mortgage our children's future based upon a four page plan and a lot of uninformed discussion. Listening to the discussions, I couldn't help remembering the line "A battle of wits among unarmed opponents."
There are no securities being acquired from the banks that are anywhere near their market value. If they were at market, however you want to calculate it, we would not have a problem that needs to be solved. And to continue stating that the assets will mature and repay the government is absurd and probably deceitful.
Look at the type of assets the government will be acquiring.
It's 2005 and a mortgage broker just granted a teaser rate mortgage that has an initial low interest rate for 3 years then "resets" in 2008. Within minutes that mortgage has been sold to a Wall Street firm which along with other mortgages will be sliced and diced into pieces and sold to investors. But for this example, assume there were only 2 pieces; the principal portion was sold to a bank in Ohio while the interest portion was sold to a bank in Texas. Everything was sold at market values and the two loans performed as they should for three years.
Then default. No more payments on the mortgage are made. The owner is gone and what's left is the real estate, depreciating daily. And of course the two securities...owned by two different investors maybe thousands of miles away.
Now the regulators and auditors start to question the value of the two securities. The question the regulator in Texas asks is: "What is the value of a security whose value is derived from the cash flow from the interest only portion of a mortgage that is in default?" [I know default is such a harsh word, that's why it's now called "non-performing"...I guess that's more politically correct.]
If there is no expected cash flow, more than likely the regulator will require the bank to reduce the value of the security...but that hurts the equity of the bank. Bank failure, lines to redeem deposits, run on the bank...but wait, just like in the old westerns, just when Pauline is tied to the tracks, over the hill comes Hank, Ben and George to save the day. They tell the bank, "We will buy that security from you at an 'agreed price' so your equity won't be impaired. We can do this because we can wait forever until the interest on that defaulted mortgage starts to pay." [What goes unsaid is if the interest is never paid, the taxpayer will foot the bill.]
For any of you left reading, I'm getting to the point. As of September 26, 2008, the total net worth of the US banking system was about $1.2 Trillion, according the the Federal Reserve Bank. The taxpayers are being asked to "invest" $700 Billion to keep the system afloat. To me, it appears that the taxpayers will be the major owner of the financial system.
It is time to start talking about the 800 pound gorilla in the room. It may be time to nationalize those banks that have proven that management is or was incapable of managing. [BTW you have no idea how much it hurts to say that.]
And the friends of Paulson, Bernake and Bush will be rewarded when the government privatizes the banking system in the future. Hopefully the taxpayer will then be rewarded.
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