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Politics : Politics of Energy -- Ignore unavailable to you. Want to Upgrade?

To: Road Walker who wrote (2583)	9/23/2008 11:57:15 AM
From: TimF	Read Replies (1) \| Respond to of 86356

OT First, the agency could act as a deep-pocketed private investor that sees a bargain buying opportunity — Warren Buffett on steroids. This strategy makes sense if one believes that the crisis has caused the prices of mortgage-backed securities to fall far below their fundamental worth, and that pushing them back up to their real value will be enough to restore the health of the financial sector. I think there is probably some truth to this theory, but its impossible to be totally sure, and it can take a long time before value gets restored. The main problem with the assets isn't low valuations (although that obviously hurts banks and other institutions that own them with borrowed money), but there uncertain valuations. Since there isn't much of a market for them no one really knows what they are worth. The Fed and the Treasury don't know either. To the extent that the owners of these bad investments have any idea how much they are worth they have an incentive to unload the worst of them on the Fed, the ones least likely to ever increase in value, while keeping some of the ones with a chance for themselves. There is likely to be a lot of adverse selection for the government going on here. For one thing, overpaying for the mortgages would help the banks’ current debt and stock holders. This kind of gift to existing investors (with no upside for the taxpayers providing the money) sets a terrible precedent Agreed. The standard economics and finance term is "moral hazard". If investors think they can get all the upside while getting protection on the downside they are inspired to take all sorts of risks that would otherwise be unreasonable. Another issue is once the government owns these bad and semi-bad loans what does it do with them. Does it allow the housing market to decline, and also force people who can't pay out of their houses, or does it run the assets for political purposes rather than sound financial ones, and keep the market from really settling out.