I'm still having a hard time figuring this all out.
If mortgages were chickens this is how the problem occurred: There are `millions of chickens. Some of these chickens are in very good shape and will produce like clockwork (ARM loans to folks who make the bucks and move every two years), many more are a bit long in the beak, weak in the legs and cant lay on demand anymore, but have pretty plumage and can still forage for their selves (might make the reset payments). And, then, there are a whole passel of chickens that are already dead but too dumb to lie down (still standing, yes? Waiting to be knocked over on reset).
Now, the chicken market is going great guns and all chickens regardless of condition look really fine to the chicken choking business eagles who, flush with cash, want to grab up these chooks and take the `meat back to their nest of shareholders before their competiors do.
So, the chickens are divided into tranches (French for slice) The eagles will pay top dollar for a flock of the high producing chooks (dont make as much interest, but egg production is guaranteed). The next group of less productive chooks cost less but, if they come through with the eggs there is more profit to be made! And so on through the run until they pay least, for the truly speculative pile of half breathing chooks, hoping to clean up if they keep gasping long enough.
But! there are rating agencies that determine whether youre buying a really GOOD (trucks instead of tranche, now) `truck of chickens (lots of mortgages packaged together) or not (AAA chickens !! top roost!). However, the folks loading the trucks were hiding BAD CHICKENS in with the good and the chicken raters didnt exam them too closely. But, just as any hauler would do, the financial companies/banks/etc. bought insurance on their particular loads of chickens (just in case). However, the insurance providers werent required to be capitalized (unlike State Farm may refuse your claim but have the money to pay if they wanted to).
So, the highway is full of trucks full of chickens and everyone is sure theyll get to where theyre going and make lots of money on the way. But, ah heck, price of gas goes up (literally) economy starts to slow and chickens start coming home to roost, if they arent expiring suddenly. But, now, no one wants these chickens ( exactly whats in the trucks good/bad/ugly?). The insurance is kaput because there was never any money to pay claims.
Millions of chickens in thousands of trucks make everyone run around like `suits' with their heads cut off! `Why should I loan you any money if we cant go through the truck and find out what kind of collateral youre actually hauling???' Nearly all the big boys have these `repackaged bunches of chickens on trucks and none of them trust anyone elses chook valuations and so the chickens pass into the realm of the toxic and the highways are clogged with them, nothing (credit) is moving! So, the Fed comes along to take possession of the trucks at the lowest possible (we hope) price, bring in their inspectors and figure out what they are worth thereby clearing the roads. Once this is done the new buyers (who will probably be required to move the newly grouped chooks at low rates) will sell the chickens (if we dont tank there will be a market). (sorry for stretching the analogy)...
I really expect well make money off of everything the governments grabbed up. This is a near-beer problem (if action is taken, it is).
I want to be clear that I'm no apologist for idiocy and greed (on my good days I love Tom Paine, on my bad days - today - I'd be emulating Joseph Stalin given the chance)
Below an excerpt from a speech given on the 9/25 by the CEO of the Dallas Fed:
Even before tackling the task of cementing capital adequacy, we need to bear in mind that the TARP places one more straw on the back of the frightfully encumbered camel that is the federal government ledger. Other off-balance-sheet liabilities were already in place before Washington took on additional burdens from the reorganization of Fannie Mae and Freddie Mac and whatever we realizewhich may, after all is said and done, be a positive returnfrom the liquidation of collateralized loans made through the Fed to Bear Stearns and AIG, and now the Treasurys discharging of x dollars of mortgage-related securities for which there is presently no palpable market. (I say x because under the proposal made, the taxpayers outlay is not $700 billion; it is the difference between $700 billion and the return earned on that $700 billion investment.)
Foremost among the existing liabilities are some $13 trillion in unfunded Social Security benefits and Medicare obligations already promised to the people but as yet unfunded, an obligation that the Dallas Fed staff estimates at a present value of over $80 trillion.[8] The former comptroller general of the United States, David Walker, estimates the Medicare deficit to be less, only $34 trillion, so lets work with his less-excitable numbers. With everything including Social Security and Medicare properly accounted for, Mr. Walker estimates that as of September 30, 2007, the federal government was in a $53 trillion fiscal hole, equal to $455,000 per household and $175,000 per person.
700 Billion is a puny amount, eh?
Counting out loud to a billion? ~32yr. Counting out loud to a trillion? ~32,000yr.
We send ~700 billion out of country EVERY YEAR to purchase energy (one form or another)... (we really could staunch that flow - best thing we could do for our economy and posterity IMHO).
If mortgages were chickens this is how the problem occurred: There are `millions of chickens. Some of these chickens are in very good shape and will produce like clockwork (ARM loans to folks who make the bucks and move every two years), many more are a bit long in the beak, weak in the legs and cant lay on demand anymore, but have pretty plumage and can still forage for their selves (might make the reset payments). And, then, there are a whole passel of chickens that are already dead but too dumb to lie down (still standing, yes? Waiting to be knocked over on reset).
Now, the chicken market is going great guns and all chickens regardless of condition look really fine to the chicken choking business eagles who, flush with cash, want to grab up these chooks and take the `meat back to their nest of shareholders before their competiors do.
So, the chickens are divided into tranches (French for slice) The eagles will pay top dollar for a flock of the high producing chooks (dont make as much interest, but egg production is guaranteed). The next group of less productive chooks cost less but, if they come through with the eggs there is more profit to be made! And so on through the run until they pay least, for the truly speculative pile of half breathing chooks, hoping to clean up if they keep gasping long enough.
But! there are rating agencies that determine whether youre buying a really GOOD (trucks instead of tranche, now) `truck of chickens (lots of mortgages packaged together) or not (AAA chickens !! top roost!). However, the folks loading the trucks were hiding BAD CHICKENS in with the good and the chicken raters didnt exam them too closely. But, just as any hauler would do, the financial companies/banks/etc. bought insurance on their particular loads of chickens (just in case). However, the insurance providers werent required to be capitalized (unlike State Farm may refuse your claim but have the money to pay if they wanted to).
So, the highway is full of trucks full of chickens and everyone is sure theyll get to where theyre going and make lots of money on the way. But, ah heck, price of gas goes up (literally) economy starts to slow and chickens start coming home to roost, if they arent expiring suddenly. But, now, no one wants these chickens ( exactly whats in the trucks good/bad/ugly?). The insurance is kaput because there was never any money to pay claims.
Millions of chickens in thousands of trucks make everyone run around like `suits' with their heads cut off! `Why should I loan you any money if we cant go through the truck and find out what kind of collateral youre actually hauling???' Nearly all the big boys have these `repackaged bunches of chickens on trucks and none of them trust anyone elses chook valuations and so the chickens pass into the realm of the toxic and the highways are clogged with them, nothing (credit) is moving! So, the Fed comes along to take possession of the trucks at the lowest possible (we hope) price, bring in their inspectors and figure out what they are worth thereby clearing the roads. Once this is done the new buyers (who will probably be required to move the newly grouped chooks at low rates) will sell the chickens (if we dont tank there will be a market). (sorry for stretching the analogy)...
I really expect well make money off of everything the governments grabbed up. This is a near-beer problem (if action is taken, it is).
I want to be clear that I'm no apologist for idiocy and greed (on my good days I love Tom Paine, on my bad days - today - I'd be emulating Joseph Stalin given the chance)
Below an excerpt from a speech given on the 9/25 by the CEO of the Dallas Fed:
Even before tackling the task of cementing capital adequacy, we need to bear in mind that the TARP places one more straw on the back of the frightfully encumbered camel that is the federal government ledger. Other off-balance-sheet liabilities were already in place before Washington took on additional burdens from the reorganization of Fannie Mae and Freddie Mac and whatever we realizewhich may, after all is said and done, be a positive returnfrom the liquidation of collateralized loans made through the Fed to Bear Stearns and AIG, and now the Treasurys discharging of x dollars of mortgage-related securities for which there is presently no palpable market. (I say x because under the proposal made, the taxpayers outlay is not $700 billion; it is the difference between $700 billion and the return earned on that $700 billion investment.)
Foremost among the existing liabilities are some $13 trillion in unfunded Social Security benefits and Medicare obligations already promised to the people but as yet unfunded, an obligation that the Dallas Fed staff estimates at a present value of over $80 trillion.[8] The former comptroller general of the United States, David Walker, estimates the Medicare deficit to be less, only $34 trillion, so lets work with his less-excitable numbers. With everything including Social Security and Medicare properly accounted for, Mr. Walker estimates that as of September 30, 2007, the federal government was in a $53 trillion fiscal hole, equal to $455,000 per household and $175,000 per person.
700 Billion is a puny amount, eh?
Counting out loud to a billion? ~32yr. Counting out loud to a trillion? ~32,000yr.
We send ~700 billion out of country EVERY YEAR to purchase energy (one form or another)... (we really could staunch that flow - best thing we could do for our economy and posterity IMHO).
