The $80 billion big bank band-aid

There are a number of big developments in the credit crisis today, with more coming tomorrow:

Today, from The N.Y.Times: "The biggest banks in the United States, with active encouragement from the Treasury Department, unveiled a plan to keep the housing-related debt crisis from worsening. The L.A.Times calls it an "$80 billion fund to buy bonds." The N.Y. Times says the new entity could raise as much as $200 billion. A Goldman Sachs economist quoted by the N.Y. Times is unimpressed.

Also today, Fed Chairman Bernanke gave a "gloomy assessment of both the mortgage and housing markets," according to the N.Y. Times. Bernanke: “Despite a few encouraging signs, conditions in mortgage markets remain difficult." Asked today about the mortgage-backed securities, Bernanke answered, “I’d like to know what those damn things are worth." It's not clear if he meant that as a joke.

Coming tomorrow: Treasury Secretary Paulson, the driving force behind the bank fund, will do some serious jawboning, the N.Y. Times reports:  "Mr. Paulson plans to step up pressure on mortgage lenders and mortgage-servicing companies to renegotiate terms for people in danger of defaulting on expensive sub-prime loans." More from Paulson in an interview Monday: “The current process is not working well. ... I want to see more results. I don’t want to see foreclosures taking place where 50 percent of the people haven’t talked to anybody.”

Our take: All of these developments signal that the mortgage market is not improving; these are all signs of growing concern on Wall Street and Washington.  The Bush White House -- speaking through Paulson -- is clearly upset that the mortgage industry is not doing enough to rework loans and avoid foreclosures. The President and Paulson have already leaned on the industry -- in public -- to work with borrowers. It isn't happening.

Your take? Comments? Insights? Email story tips to lalandblog@yahoo.com.

Comments

[mike]

it will send a message that it is o.k. to screw off your credit. if you can have your junk mortgage lowered because of default,what is the point of keeping a good credit profile???? and if you think there is trouble now, wait until something like that happens!!!!!!!!!!!

[Rob]

Short of complete government oversight (which nobody wants) the Housing Market is burnt toast. Only the fools and the very smart are still in the market and you know who is on the losing end of that deal.

Lets just prolong the inevitable by throwing money at it. The question now is, will moves like this exponentially fail?

[george]

on one hand, keeping price stability (low inflation) is considered good
but having home prices in check is considered bad

The REAL issue here is that housing appreciation was intended as a surreal substitute for social security - government is unable to pay, so let's skew financial world of many people and make prices of homes go artificially up - and the next generation foots the bill that social security can't (by giving money to current generation of home owners through pumped up prices). I don't think it'll work.

number of people who can't afford housing will just increase while number of people who are currently affected by housing crisis (due to their own greed in many cases) will only decrease.

government is only making lots (and increasingly so) people mad and close to the edge with all this bail out talk. They are propping up the prices by taking money from responsible people and giving it to the irresponsible ones. I see now why Robin Hood started his gig in the woods.

Why would one even try to be productive in this kind of economy? What if you work hard and get 20K more in salary? With these prices, it's nothing. Sure you can buy 10 more big-screen TVs. But you don't need 10 more big-screen TVs, you need a home.

I think I will immigrate to Australia (I work in IT with 6 figures salary), at least wine is good there

[YetAnotherReader]

For further comments, see:

http://online.barrons.com/article/SB119244948063659074.
html?mod=9_0002_b_online_exclusives_weekday_r1

If the link doesn't work, go to www.barrons.com and look for the Up And Down Wall Street column.

I don't think the "buyer's strike" factor has been discussed enough in the various real estate blogs.

[anon1137]

These new bonds that Citi, BofA, and JPMC are setting up seem to be just another way to hide a smelly problem to keep everyone from noticing that it smells so bad. The public needs to be vigilant that, in the process of moving this stuff around, it doesn't get moved onto the balance sheet of the federal government.

The current economic environment is going to put accounting firms and credit rating agencies to the test. We may find out in future congressional hearings whether they were able to maintain their integrity or cave in under the pressure.

[MyLessThanPrimeBeef]

How do you price mortgaged back securities, Uncle Bin Lackey asked.

Good question.

Will the guys who won the Nobel price in Economics for his work on options pricing please call the Fed chairman please.

And while you two are at it, why don't you work on how to price a house in Santa Monica as well, because apparently nobody knows either.

[Tombstone Realty]

All this makes me think is that the economy is screwed.

Even Bernanke, who started his term saying the mortgage crisis would only be restricted to the subprime market, is now saying that it will be a significant drag on the economy.

I'm not sure if they were clueless, or were lying in order to keep the market's confidence up. Now that the worst *is* coming to pass, the Feds/bankers are trying to make it look as if they've been on top of the situation all along.

The feds can lean on lenders all they want - unfortunately some of them are no longer around to do any refinancing. Not only that - the mortgage price is only *part* of the equation. How are these banks going to help all the related industries, construction, auto, durable goods through this?

This "bailout" is just a finger stuck in a crack on the Hoover Dam.