CBO initial analysis on Paulson's $700B Bail out

[Robert Oak]

Over on The Economic Populist

is a blog post going through the latest testimony of the Congressional Budget Office on Paulson's Plan as well as some of the Democrat modificiations.

raw link:
http://www.economicpopulist.org/?q=content/budget-ultimate-credit-card-paulson-wants-have

Bottom line is the CBO is saying it might only not work, it might backfire.

Ironically, the intervention could even trigger additional failures of large institutions, because some institutions may be carrying troubled assets on their books at inflated values

Also on The Economic Populist is a great post on how there is no guarantee this will work.

raw link:
http://www.economicpopulist.org/?q=content/over-800-billion-already-spent-bailing-out-wall-street

[Eric J in MN]

1. If a corporation has "troubled assets on their books at inflated values"

...and Treasury offers them a low price, then they can say no.

How would that hurt the corporation?

[Robert Oak]

3. once properly evaluated

in other words is all of that toxic paper is exposed at once.....bear in mind a lot of this stuff is "off the books". Think of derivatives as insurance. They sell these things (CDS) for premiums and only in the case of a default they come due...
i.e. if you're selling insurance well if someone's house burns down, you're supposed to then pay up.

Insolvency forces the issuer to pay up on these CDSes.

but if they expose the reality of this shadow banking system all at once, all of this off the books toxic debt which currently is way over valued to prop up these various institutions...
it will show the insolvency of these very institutions...
well, when one is insolvent the default occurs which means someone has to pony up to pay out on the underlying asset...instead of simply collecting fake money on the premiums.

I don't know if that's clear but it has to do with CDOs and credit default swaps. Over on EP, I have spent a lot of time trying to find
"plain english" explanations on how all of this works. Lots of posts and videos on it and we have a search...search on CDO and credit default swaps.

[FreakinDJ]

2. The more they foreclose the lower the values go down

Catch 22

So why pump money into Wall St?

Why not allow banks and Court Judges to "Re-negotiate" the loan.

Banks have been "Short Selling" at 60% of the value of the mortgage. BUT if they "Wrote Down" the mortgage vale 10% - 20% the home owner could afford payments

[Robert Oak]

4. HOLC

which is actually Hillary Clinton's plan and it's a damn good one too.

They enable troubled mortgages to go into HOLC AND basically allow the people to renegotiate down the total mortage price, i.e. 70% of the total original loan amount or other terms depending...person doesn't lose house, no foreclosure,....

prices would come down but prices are still too high for most people to afford a home in the United States.

(in spite of what Paulson tries to claim).