Chuck Bao
9/30/2008, 09:48 AM
I’m going to predict the unfolding events of the Second Great Depression in my new book “What they did all wrong, lolz”. Obviously, this is a work in progress.
If you want to add your own chapters, we can share royalties.
Chapter 1: The plan and good intentions
The $700bn rescue plan passes Congress and is signed by President Bush in the second week of October. Global stock markets go crazy and make the biggest one-day gain in the history of mankind.
Some entrepreneurizing individuals eventually make a video of it called “Stock Markets Gone Wild”. Rich people are said to use the video for their personal gratification, but I wouldn’t know about that.
Treasury Secretary Hank Paulson immediately commissions a team of investment bankers, who determine that the downside risk of the property market from the mortgaged value is 30% in some areas, 20% in other areas and 10% in yet others.
This study and the zoning are never made public, which is a great pity since Paulson makes them multi-millionaires (or pays them normal investment banker salaries) by coming up with this brilliant scheme.
Paulson, then, initiates a plan to buy back defaulted mortgages from banks at an average 80 cents on the dollar under the assumption that the underlying asset values should eventually allow sale of these debt obligations at breakeven or a slight profit given a long enough period.
Oh and never mind the accrued interest and time value of money. As a Treasury Secretary and you can just print money, you tend to lose sight of that time value thingy.
Since the US government is willing to buy defaulted mortgages at 80 cents on the dollar, well above the current mark-to-market value of 20-60 cents, most banks obviously would want to participate in this scheme.
Chapter 2: Mark-to-market suspended – there is no fire sale, repeat there is no fire sale about to go on here because the US government is buying this crap
US accounting standards are conveniently changed to temporarily waive the “mark-to-market” rule. This gives all banks breathing room to gradually and eventually raise enough capital to offset the sale of mortgages at a loss.
Banks volunteer for the scheme on a gradual basis as their capital base allows, just skirting the capital adequacy limit. At this rate, it will take more than 25 years to gradually unload the growing bad debt. But, never mind that. What the public doesn’t know won’t hurt them.
It also gives Paulson’s plan some breathing space as well because it would, otherwise, become quite apparent that the $700bn mandated is not enough to buy up all of the growing number of defaulted mortgages.
It also makes a joke of the US accounting standard, which if applied like yesterday, executives of Enron would still be very rich men today. The new standard is officially called “mark it down when you can afford it.”
Chapter 3: Priority in the non-fire sale
As mentioned in the previous chapter, the $700bn is not enough. Priority is given to JP Morgan, Citibank and Bank of America for their recent takeovers of failed financial institutions. Smaller regional banks are given second priority.
Foreign banks are **** out of luck because they cannot agree with some of the oversight clauses and pay scale for executives. Foreign banks and particularly foreign sovereign funds go WTF? If you aren’t playing fair with us, we are taking our ball and going home.
Chapter 4: Accountants, bankers and lawyers, oh my!
The $700bn amount isn’t the biggest constraint. Paulson has to hire thousands upon thousands of accountants, lawyers, former bankers to process the government purchased mortgages and mortgage-backed securities. There are so many of them and for what the taxpayer is going to pay them, we might as well give each of them one of the defaulted houses and just call it even and case closed. But in reality, they are backed up for three years, just on the initial applications. If your loan isn’t in the first wave, sit back and wait for 5-10 years.
Chapter 5: My hair, my hair, where’s my haircut
Paulson also plans to give homebuyers a chance to buy back their mortgages at a discount. I assume an 80% discount and possibly adjusted by that time value of money thing. He could also arrange for the “favored” banks to finance the purchase of the mortgage for homebuyers that actually qualify for that second chance. The problem is that everyone is waiting for that second chance. In fact, some decide to give up on the first chance just to get that second chance and a discount.
Chapter 6: And this is where the wheels fall off…
To be continued
If you want to add your own chapters, we can share royalties.
Chapter 1: The plan and good intentions
The $700bn rescue plan passes Congress and is signed by President Bush in the second week of October. Global stock markets go crazy and make the biggest one-day gain in the history of mankind.
Some entrepreneurizing individuals eventually make a video of it called “Stock Markets Gone Wild”. Rich people are said to use the video for their personal gratification, but I wouldn’t know about that.
Treasury Secretary Hank Paulson immediately commissions a team of investment bankers, who determine that the downside risk of the property market from the mortgaged value is 30% in some areas, 20% in other areas and 10% in yet others.
This study and the zoning are never made public, which is a great pity since Paulson makes them multi-millionaires (or pays them normal investment banker salaries) by coming up with this brilliant scheme.
Paulson, then, initiates a plan to buy back defaulted mortgages from banks at an average 80 cents on the dollar under the assumption that the underlying asset values should eventually allow sale of these debt obligations at breakeven or a slight profit given a long enough period.
Oh and never mind the accrued interest and time value of money. As a Treasury Secretary and you can just print money, you tend to lose sight of that time value thingy.
Since the US government is willing to buy defaulted mortgages at 80 cents on the dollar, well above the current mark-to-market value of 20-60 cents, most banks obviously would want to participate in this scheme.
Chapter 2: Mark-to-market suspended – there is no fire sale, repeat there is no fire sale about to go on here because the US government is buying this crap
US accounting standards are conveniently changed to temporarily waive the “mark-to-market” rule. This gives all banks breathing room to gradually and eventually raise enough capital to offset the sale of mortgages at a loss.
Banks volunteer for the scheme on a gradual basis as their capital base allows, just skirting the capital adequacy limit. At this rate, it will take more than 25 years to gradually unload the growing bad debt. But, never mind that. What the public doesn’t know won’t hurt them.
It also gives Paulson’s plan some breathing space as well because it would, otherwise, become quite apparent that the $700bn mandated is not enough to buy up all of the growing number of defaulted mortgages.
It also makes a joke of the US accounting standard, which if applied like yesterday, executives of Enron would still be very rich men today. The new standard is officially called “mark it down when you can afford it.”
Chapter 3: Priority in the non-fire sale
As mentioned in the previous chapter, the $700bn is not enough. Priority is given to JP Morgan, Citibank and Bank of America for their recent takeovers of failed financial institutions. Smaller regional banks are given second priority.
Foreign banks are **** out of luck because they cannot agree with some of the oversight clauses and pay scale for executives. Foreign banks and particularly foreign sovereign funds go WTF? If you aren’t playing fair with us, we are taking our ball and going home.
Chapter 4: Accountants, bankers and lawyers, oh my!
The $700bn amount isn’t the biggest constraint. Paulson has to hire thousands upon thousands of accountants, lawyers, former bankers to process the government purchased mortgages and mortgage-backed securities. There are so many of them and for what the taxpayer is going to pay them, we might as well give each of them one of the defaulted houses and just call it even and case closed. But in reality, they are backed up for three years, just on the initial applications. If your loan isn’t in the first wave, sit back and wait for 5-10 years.
Chapter 5: My hair, my hair, where’s my haircut
Paulson also plans to give homebuyers a chance to buy back their mortgages at a discount. I assume an 80% discount and possibly adjusted by that time value of money thing. He could also arrange for the “favored” banks to finance the purchase of the mortgage for homebuyers that actually qualify for that second chance. The problem is that everyone is waiting for that second chance. In fact, some decide to give up on the first chance just to get that second chance and a discount.
Chapter 6: And this is where the wheels fall off…
To be continued