Kerry against bad assets bill + Kerry on MTP Sunday

[Mass]

http://firstread.msnbc.msn.com/firstread/archive/category/1304.aspx

Finance committee member John Kerry said on MSNBC's Andrea Mitchell Reports that he is against the reported bad bank proposal Treasury is working on.


Kerry said he'd prefer to see the banks write off their losses, take their hits and avoid more taxpayer liability

[karynnj]

1. I agree with him

He has a real point that the bad asset plan good lead to the government paying more than the assets are worth under that plan - meaning that the taxpayers would be propping up shareholder value. Now, shareholders of bank stock made a large amount of money in the years when the banks were taking unreasonable risks. People who buy stock are taking the risk that it could go down - though anyone reasonably diversified gained year after year - with only a few exceptions - made up in subsequent years. The stockholder, not all taxpayers took the risk.

[YvonneCa]

4. Stockholders may be more aware...

...of their risk when making a choice. But I think...and this is the unfair part...all taxpayers got saddled with the risk, and now the loss. The question is, how large is the loss that banks are covering up? I've heard HUGE etimates (like $60 trillion or so). If that's true...and I have no idea if these people are credible...banks coming clean with their situation could be frightening. It's also probably necessary. I think JK is calling for a necessary step...but hold on to your hat, this ride will be bumpy. :)

[sandnsea]

2. I think the losses will bankrupt them

I think that's the problem, isn't it? If we just keep giving the banks money, they'll just keep pouring it into that black hole of loss from no return on their mortgage security sales.

[karynnj]

3. That's why Kerry wants them to get to real numbers now

and then they can be recapitalized, with the taxpayer getting a stake when the assets improve.

Neither plan will be fun - the truth is that idiotic lack of regulations caused people, who bought shares, to think they were worth more than they should have been. I'm not sure which way is better - but the key is to insure that the people who took the risk bear the bulk of the loss - not spreading it over the country. That is just fair - anyone with a portofolio of stocks got really good returns over the last couple of decades - more than the real increase in value of the companies. (Look at a graph of the DOw/Jones or any other index. Both aim to do the same thing - to make the banks and the financial system healthy and honest.

[YvonneCa]

5. I agree with you that we need real numbers. But...

...it will not, unfortunately, be fair (JMHO).

"...but the key is to insure that the people who took the risk bear the bulk of the loss - not spreading it over the country."

This risk/loss has not only spread all over the country, it has spread all over the world. I agree that fairness requires that the people who took the risk should bear most of the loss...but I don't think that's possible here. (Think Madoff) I think our best option for fairness is to insist on changes/regulations thatwill make sure this NEVER happens again.

[karynnj]

16. I agree

There also were people who took the risk by proxy as their pensions were invested by others.

The thing is that there is a risk to stock - but people have thought that there was very little if they had a diversified portfolio. Since I left college in 1972, there has not been a LONG interval where you would have done better just keeping your money in the bank. I also know people who did have a huge amount of their own companies stock - and lost most of their savings when it tanked - Lucent for instance. The government did not replace a portion of that money.

I definitely agree that putting back regulation - many that FDR put in because of the crash that led to the great depression is the way forward. There is NO WAY to have only the stockholders impacted - as you say the down stream effects have hit millions - here and overseas.

I do see that there will be a fight to determine how much stake the government gets for the money it puts in. What I see is that Kerry is on the side of giving more to the government - diluting the % owned by the current stockholders more than the Treasury people would do. This is likely not a case of win/lose, rather a case of where on the spectrum we end up.

[sandnsea]

6. I don't think they know the real numbers

I also don't think there is anything for taxpayers to get a stake in. Their black hole is nothing more than a phony balance sheet. It says they have assets, but they don't. If you write off those supposed assets, they're bankrupt. The only thing to do is buy them to put the balance sheet back in order so they can operate again. Seems to me.

[globalvillage]

7. Damn. No MTP in Pittsburgh today.

Just Superbowl pre-pre-pre game stuff. I'll have to watch later on MSNBC.

Please post about it if you can. Thanks.

[karynnj]

8. The NBC site says that it is on at 11am today- for eastern time

(I just checked NBC's web site.)

[globalvillage]

9. Not in Pittsburgh.

Pre-game stuff all day on NBC

[karynnj]

10. I guess Pittsburgh would have more - duh

[karynnj]

11. Kerry is saying that many Democratic wants dovetail with the

economic need. High speed rail, broadband internet, education needed for modern economy.
Says that Grassley advocated for AMT and Specter for increase to National Institute of Health.

Kerry said they put the entire bill on the internet - all these things are being argued on the floor of the Senate - not done in private.

(This was in answer to an awful Gregory question on whether Obama is reacting as Bush did with 911 to use crisis to do what their party already wanted to do.

Gregory then said something about truth being on both sides.

- Kerry said that - it is not true - because we tried the other for the last 8 years. We are now 17th in broadband internet, we are hurt by roads that are clogged. Hutchinson disagreed with Kerry - saying that tax cuts brought people back into the market.

Kerry said you need to deal with the bank problem and mortgage problem as well as creating jobs.

Kerry defended social spending - saying a later person will defend the stimulate caused by things like food stamps and unemployment insurance - and that it was a moral need that a government has to do. Hutchinson said UI was always bripartisan that they never voted against it (??)

Kerry asked if they will get Republican votes - Kerry spoke of effort that Obama made. Kerry said that the Republicans need to invest in the legislation. Kerry said that the amendments will be voted on.

Hutchinson was then asked if the stimulus will work without doing something about the banks. She answered "absolutely". Kerry spoke of thinking about the taxpayer first over the shareholders. Not about the banks but how you get lending back. (Kerry gave very detailed answer that I can't sum up well)

Hutchinson said Gregg would not leave the senate giving the Democrats 60. Kerry said that Daschle's and Geitner's errors innocent.

(I missed the beginning because of getting ready for having friends over for teh SB.

[globalvillage]

12. Awesome!

You're swell. Thanks for posting this.

:-)

[karynnj]

15. The video - when available will be much better

I missed a lot in the summary - he was really on. KBH was good at giving the Republican points, but he was amazing. I really liked when he brought up that the government has a moral obligation referring to increasing food stamps. (This was the Kerry people really need to see. )

[globalvillage]

17. YES!

It's up on the MTP site now.

http://www.msnbc.msn.com/id/3032608

[sandnsea]

13. The banks

I'm still confused about his position on the banks and why he thinks they can just write off the losses and then be recapitalized, and is he asking for any changes in regulation. It's only 10:00 here, maybe I'll try to catch it before I head out. Davos is on CNN now so that might be interesting.

I also think they're explaining the need for social spending wrong. We need to do it to help states so states don't have to lay off people. And the reason we are returning money in the form of credits is so wealthy corporations who already got 8 years of tax cuts don't get more.

[karynnj]

14. Write down - not write off

The loans are there now at face value. This is just inaccurate and ENRON accounting. If they are written down to levels that are truer, many of the banks will be under water. What Kerry seemed to say is that several ways can then be used to give the government warrants or stocks for the money the government then puts in to recapitalize the banks.

This is an alternative to doing what the RTC did in the savings and loan situation. This is designed to give the government the ability to gain when those assets appreciate. (The Bad bank method is likely to give the shareholders of the banks too much and the assets assigned to the "bad bank" will be bought and will likely appreciate when the economy turns around.

Kerry in the Finance committee used exactly the reason you do for giving money directly to the states - so firefighters, teachers, police etc keep their jobs. I agree that that is the best way to make the case for money to the states - it brings home exactly what the states will do with it. (Kerry speaking that way was compelling and an oasis on a committee speaking in abstract financial terms.)

[sandnsea]

18. Thanks

I will roll that around in my head.

The past 24 hours I have finally grasped what Republicans mean when they talk up the economy and against Democratic "spending". Still sorting it all out in my head.

Did you know 20% of the stimulus is health care? I'm headed to meet with some people to figure out how to get a school levy passed so we don't have to cut teachers. I'm wondering how much of our school budget problems are health care premiums, wondered that for quite a long time actually.

[karynnj]

20. Here is something that explains the problem clearly

It speaks of two different options - the "bad bank" one and the government insuring assets. http://www.nytimes.com/2009/02/02/business/economy/02value.html?pagewanted=1&_r=1&hp

The article does include a nice example and explanation of the value of the a specific bond. I think the most important thing is to find an equitable way to value the loans so the program is not a welfare program for stockholders and bank CEOs. In this example, it is intuitive that the value given by the bank - 97% - is not true. If the average bad asset is really worth 3% less than anticipated - the banks could easily write it down and might not even need government assistance. Banks have ALWAYS had some losing assets. Yet, the banks are likely correct that the sales that do occur are fire sales - so 38% is likely too low. Where the value is assigned under any plan is likely more important in terms of fairness that the choice of plan.

Under the "bad" bank approach, the valuation is the price the "bad" bank acquires a bond for.
Under the plan Kerry prefers (based on the sketchy description), the valuation affects the percent of the company's value the government would get - as it would be based on the relative amount the bank assets were considered to be worth and the amount the government put in. Here if the bank's bonds, after being written down by the bank, were aggregated to be $2 million and the government put in $1 million, the government would effectively own a third of the bank - but if the unknowable "true" value of the bank's bonds was really $1 million - the government should get a half. So, the same problem exists.

One lever that should help is that if the bank's over estimated the assets, they would get very little government money to make them whole and they would not really be back in a healthy state. This is an incentive to make an honest evaluation. In the bad bank scenario, there is no down side for the banks to pushing for high estimates - once sold at a pretty penny to the government, they are no longer their problem, but ours. They might though become the speculators who buy the assets a few years down the road from the "bad" bank for a low price and then gain as they recover value - partially due to the government working on the mortgage problem as well. (Take this with a grain of salt - it is not from the article or from what Kerry said - it is my attempt to understanding what people smarter than me and with education and experience in Finance (of which I have none) - have not come to clear consensus agreement on.)

Kerry's comments on MTP do not say he would not support the alternative. It is constructive that he and the experts advising him are addressing the dynamics of the alternative plans. It would seem, from his comments, that if the "bad" bank plan is adopted, he would look to finding a way to do the best in assuring that we don't pay too much and that once the assets are aquired, they aren't sold too cheaply. (It sounds like he thinks the latter (and maybe the former ?) happened in the RTC - so this is Kerry using what he learned.)

[sandnsea]

21. The bonds need to be valued

"The financial institution that owns the bond calculates the value at 97 cents on the dollar, or a mere 3 percent loss. But S.& P. estimates it is worth 87 cents, based on the current loan-default rate, and could be worth 53 cents under a bleaker situation that contemplates a doubling of defaults. But even that might be optimistic, because the bond traded recently for just 38 cents on the dollar, reflecting the even gloomier outlook of investors."

And they were valued originally on potential profit from increased interest rates, not the actual value of the mortgages when they were sold. That's why you can't just write the mortgages down and move on. They aren't the core of the problem, the bonds based on inflated future profits are the problem. That's a whole different pile of money than the mortgages.

[karynnj]

22. The bonds were originally valued based on the likely revenue

stream from all the mortgages - and that stream did reflect the likelihood of the interest rates increasing over time. This was the market's view of the future earning stream of those mortgages.
If the failing mortgages could be converted they would be worth more than zero, but less than anticipated. It would be less than the value based on the higher rates, but more than the rate with them failing. Stockholders are NOT guaranteed that the value of their stock won't decline. (All stocks are in reality based on market expectation of the company's future earnings. Many very reputable companies had stock that imploded as they failed.)

I agree that there are two programs here - to deal with the failed mortgages and to restore the health of the banks, who were too heavily invested in the mortgage based stocks. These are not completely independent however - and what we do on the mortgage side, in addition to the economy improving, that will cause the "bad" assets to appreciate from where they are now.

As you say, the bonds need to be valued. That is really the heart of ANY process taken to fix this. What that article showed though was the HUGE range of possible values to assign. Classic economics would go with market value (38 cents) while the banks will want close to the value they have on their books (97 cents). I think this is where the real battle will be fought. The closer to 97 cents, the more investors regain their money - the closer to 38 cents, the less the deal ultimately costs the government.

[sandnsea]

23. The market's view?

The lies that were told by idiots who supposedly couldn't figure out that people on a budget weren't going to be able to afford $100 a month more, let alone $500+ more. It wasn't the "market's view", it was either pure stupidity or fraud, and I vote fraud because they can't be so stupid as to be unable to calculate a family budget. That's the problem in valuating those bonds. One of these days somebody who invested is going to ask that very simply question, because the "market" didn't just "value" these, people sold them and they sold them on a prospectus that somebody wrote.

[karynnj]

24. By market - I mean the price at which someone agreed to buy

and someone agreed to sell. As I said, I agree that right now the "market" rate is likely too low because some holders are forced to sell and people are leery about buying.

As to the price they attained in the bubble - that was based on past experience. As long as the housing market continued to go up, the down side (to mortgage holders) of a default was not that huge as they had the house as collateral. So, when the economy was better - most of the loans paid as they were scheduled and the percent that failed suffered relatively mild losses - ending up with a combined asset that gave a good rate of return. When the economy and the housing market turned south, it crumpled like the house of cards it was.

I KNOW there is a problem in evaluating the bonds - but doing so is at the core of every single plan.

[sandnsea]

25. That's the problem with the economy

"Market speak" that covers up the reality that real people are involved in real product development, including mortgage securities, and valuations and sales and marketing, and a fair amount of pure greed; and the prices don't just set themselves by some magical "market rate" that woohoo, turns into a bubble.

[sandnsea]

19. Okay, here's my confusion

I think if the banks could just write down mortgages to the current value, reset the interest to a reasonable rate, they would. In fact, I think some of these ARMs are going to adjust back down since they're lowered the prime, the prime is lowered isn't it?

I think the problem is they sold the profits they expected in their accounts receivable, the mortgages. They sold those profits separately, as derivatives. AIG insured those profits. And I don't even know how the credit default swaps worked. But there aren't any profits in those mortgages, the bank's accounts receivables, because they wildly inflated the profits based on the premise of 10-15% interest like we had in the 80s. I imagine some of it has the potential of being fraud. If people start demanding their original mortgages, many of these banks have nothing because they can't even prove their owed money. If the people who invested begin demanding proof of what they invested in, it gets even worse. That's the real crux of the problem as I understand it. Whether or not someone can pay their mortgage is what the ponzi scheme rests on, but it isn't the real problem.