What has really happened and why the bailout money has been wasted...

Discussion in 'Economics' started by Mvic, Dec 10, 2008.

  1. Mvic


    Why is it that with all the money injected via various forms of bailouts banks are still in dire straits and mortgages and the consumer are still in as much trouble if not more than they have been since the beginning of the crisis?

    Think of it like this, a loose analogy but it essentially encapsulates what has happened:

    In the good times the banks wrote a huge number of puts (CDS/CDOs) for pennies because they thought the underlying stock (mortgages) would never go under the $100 strike price. They didn't have to put up any collateral to write these puts so it was easy and free money which is why they wrote so many of these puts. Reality hits and the stock falls to $80 (housing/mortgage defaults) meaning the banks are now on the hook for $20 per option that they sold for pennies, but they have no collateral and the options are getting called. Panic. In steps the government/tax payer and pays off the options allowing the bank to stay solvent, only just. The bad bets have been paid off but the stock is still at $80 and the homeowners/consumers are in the same dire straits that they were before, despite the huge payoffs to the big speculators, and the bank can't help by lending more because the bailout money didn't go to the bank it went to pay off the big speculator who bought the puts. In hindsight it would have been far cheaper and better for the taxpayer (not to mention the economy) to have supported the stock price and kept it above $100 until option expiration.
  2. a good argument can be made that the government should cancel all CDS because they were created illegally. credit default swaps are insurance contracts and all insurance products by law are supposed to be regulated. by calling them swaps they skirted the regulators but i consider that to be an illegal act.
  3. Let's face it . . .

    We got the WRONG Goldman Sachs CEO for Treasury Secretary. Paulson is not the sharpest "tool" in the shed.

    I would suggest that John Corzine is.
  4. Mvic


    In hindsight this was THE solution, at the time they probably thought it would undermine the system and be too complicated (and the regulators who could have insisted on such early enough were woefully inadequate to the task and in the IBs pockets to boot) Now that the "contained" beast has broken out and run rampant through the whole system it is clear that cancelling the CDS would have hardly had a worse outcome than what we got.
  5. The home owner bought a call option (his house) strike price $200.

    Two different sides of the same coin, flip the coin it landed on its edge.
  6. This may be a dumb question, but who bought the puts in your analogy?
  7. Actually, I want to say the banks were both writer and seller in this case, but I guess that's the same thing. Maybe buyer and seller, but then they wouldn't have the problem.

    No, I guess it works out that the banks sold the puts, at infinite risk to themselves and their counterparties.
  8. Banjo


  9. In one sense, it's too bad this isn't China. They execute for corruption.
  10. Mvic


    I thought that the put buyers were certain hedge funds that we have read about in the news (and many more I am sure that we haven't read about) that have made billions from the collapse in RBMS but after reading this piece it could be that the banks themselves stand to potentially do very well, that would be the ultimate irony and the biggest insult:


    Could this be, in part, why the banks seem so against any workouts that might stave off these additional defaults?

    "Ambac, MBIA, PMI, General Motors, Ford and a lot of US home builders are teetering."

    Puts a new spin on the automakers bailout and those in favor and against.
    #10     Dec 10, 2008