Wednesday, September 24, 2008

Removing troubled mortgages from the market

$700 billion bailout plan

It's staggering sometimes, how you can let your guard down.

You think you have trained yourself to be skeptical about every heaping pile of crap the corporate media shovels on your doorstep and smears across your computer and/or television. But life goes on, and you get lulled back into complacency anyway, and you find that despite your best efforts, you have nonetheless allowed some of the media crap to shape your underlying assumptions.

About small things, sometimes. And you can even have predictable counterreactions based on those assumptions.

Like in the case of the $700 billion bailout. So, our great leaders propose this, and your first reaction is, "This is bullshit! They're going to buy a bunch of worthless securities from the same scum that came up with the plans to create the worthless securities in the first place!"

But then you realize you've fallen into the media craptrap again. And even in resisting their bailout plan, you've forgotten to question the deceptive way the news is presented, because you are accepting the basic details of the plan before you resist it.

Thinking about it outside the confines of the T.V., here's my stunningly obvious question. Like all stunningly-obvious questions, it reveals the dearth of analysis in corporate news, and thereby, their deceptions.

Stunningly obvious question: if the government was actually trying to spend a lot of money to keep all those mortgage securities from being worthless, even if they were planning to do so by wrongly indebting future generations of Americans, wouldn't the simplest way be to fund the mortgages that the securities depend upon?

There it is. Another dimension of the whole scheme now jumps out at you.

If you accept the details of the bailout plan as framed by the corporate media, here's the most critical explanation you can come up with (which Arthur Silber and Chris Floyd are both busy doing):

1) Wall Street begins artificially inflating the value of real estate by peddling sub-prime mortgages to people who can't pay them;
2) Wall Street gets rich packaging and trading the mortgages;
3) The bubble bursts, people default on mortgages they can't afford and lose their homes;
4) Wall Street forecloses on the lost homes, but prices are down and they can't recover the "value" they have been attributing to themselves;
5) Wall Street holds MBS (mortgage-backed securities) that aren't worth as much as they have been misrepresented to be, and houses that aren't worth as much as they have been misrepresented to be;
6) Wall Street appears to be in trouble;
7) The government indebts the taxpayers $700 billion to buy some of the worst MBS from the big firms, thereby alleviating some of Wall Street's loss.

While nefarious, this is not quite as dirty as what Wall Street actually did/is in the process of doing. This is obvious when you consider the fact that if the government used its $700 billion (or however much it will actually cost them) to fund those mortgages, the MBS held by Wall Street would still have their face value! The losses would be gone.

The end result of that policy would be that Wall Street would not lose their money--their securities would be worth what they had pretended, because the government was propping up the mortgages. Wall Street would make their dirty money, poor people would keep their homes, and the situation would be "solved" (inasmuch as any part of this charade can be solved).

But, they're not funding the mortgages. Instead, they're buying the securities off of Wall Street. Here's the catch, though: by having the government buy the securities in order to validate the security prices, rather than fund the mortgages, Wall Street still gets to foreclose on all the houses.

Do you get it, now? Because the government is buying the securities rather than funding the mortgages, Wall Street gets to have its cake and eat it too: it gets to keep the artificially-inflated price of its crappy "securities," and at the same time, it gets to foreclose on all the houses! It gets both pieces.

Poor people default, Wall Street gets houses. Wall Street then sells worthless MBS to the government at face value, and they make even more money than they would have made if their whole dirty subprime mortgage scheme had actually been paid off by the homeowners in the first place!

Here is the full deal, broken down:

1) Wall Street begins artificially inflating the value of real estate by peddling sub-prime mortgages to people who can't pay them;
2) Wall Street gets rich packaging and trading the mortgages;
3) The bubble bursts, people default on mortgages they can't afford and lose their homes;
4) Wall Street forecloses on the lost homes;
5) Wall Street sells its MBS to the taxpayers at face value;
6) Wall Street gets all the houses, and all the money

This wasn't a failure of the system--it was on purpose. The reason that lending standards were relaxed under Chris Dodd were so that low-income homeowners could sign onto the deal in the first place. This helped inflate the price of real estate, which pumped up the MBS to such a value that they could be spread throughout the entire system. The broad diffusion of these securities mandated that later on, when the values began to drop, Wall Street could threaten the country with a genuine depression in order to justify its no-bid contract for sale of MBS to the taxpayers.

Wall Street gets houses, Wall Street gets cash, and the next several generations get the bill.

Introduction to Tax Theft series

2 comments:

Druff said...

Intriguing angle. Thanks.

John Petrie said...

Thank you very much for that clear and detailed analysis of the bailout plans and the financial crisis. You're right: those idiots in the government and the MSM either don't get it or they don't want the American people to get it. If only more people were like you and me and they went to an effort to understand the financial crisis, the housing market, and the Fed's inflationary monetary policy, instead of deluding themselves that those opportunistic charlatans McCain and Obama have different positions or have the ability to solve the problem.