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Strategies & Market Trends : The Residential Real Estate Crash Index
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To: MulhollandDrive who wrote (149377)9/23/2008 12:53:51 PM
From: GraceZRead Replies (4) of 306849
 
The reason that the government is the only buyer now is because there is no market maker. As I implied in a previous post, if market participants knew that there was always someone they could sell to, someone to act as buyer of last resort if they wanted to or needed to liquidate quickly they'd be more apt to price these assets closer to their market to maturity prices. The reason you leave your money in the bank is because you trust that it will be there if you need to withdraw it.

I'm certainly not advocating that the government buy these assets at mark to maturity prices, they still have a large degree of uncertainty as to default risk, accelerating default rates.

I imagine some price that splits the difference between the two, between mark to market and mark to maturity would be a reasonable place to start. It would still leave plenty of room for capital gains to cover the risk that the government is taking. I seriously doubt conventional mortgages have as much risk in them as 80 cents on the dollar implies or Alt-A at 30 cents, yet clearly, no one thinks they should be valued using historical default rates for that asset class. Historically, default rates for mortgage assets are under 1%! Clearly those rates are headed higher.

I think the knee jerk reaction to dismiss the plan as simply a WS bailout is understandable, but short sighted. At this point where this mess is headed is 2.2 trillion in institutional money market funds suddenly becoming illiquid and NO ONE would be spared the fallout from that. It's an amount greater than M1 going poof.
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