What's the bailout actually buying?
Posted
Sep 25 2008, 01:00 PM
by
Kim Peterson
Rating:
The New York Times tries to answer two of the biggest questions in the bailout proposal. Treasury Secretary Hank Paulson wants to spend $700 billion to buy toxic assets. OK, but how much are these assets actually worth? And how much beyond that will the government pay?
All of these assets are tied to individual mortgages, the Times says. And no one knows exactly how much they're worth. Look at one example: two years ago, Bear Stearns bought from lenders nearly 3,000 mortgages, which had an average size of $450,000.
But these mortgages were "liar loans," the bizarre loans made without adequate checks into the borrower's incomes or savings, the Times says. And about 60% of them were from California, Florida and Arizona -- three states where home values have plummeted recently.
It doesn't take a rocket scientist to know that these loans stink to high heaven. And 23% of them are now delinquent or in foreclosure.
It gets even more complicated. Bear Stearns bundled the loans into 37 different kinds of bonds. And Wall Street takes bonds like that and bundles them again into CDOs, or collateralized debt obligations.
That's the kind of "asset" that Treasury wants to buy. Pity the miserable Treasury worker that must sort through this mess to try and find some value.
And here's the $700 billion quandary: The banks want the Treasury to pay more for these assets than their market value. And some argue that the Treasury should overpay, because that would inject new capital into the system. But overpaying also sacrifices more taxpayer dollars.
So to answer my original questions:
How much are these assets actually worth? No one knows.
How much beyond that will the government pay? That's being debated right now.
