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November 25, 2008



again mate, watch out for mistaking (imminently recoverable) investment for an expense.

the govt is simply providing a temporary floor to the price of the real-value of the assets, overriding the current market hysteria. this lets citi tick the capital adequacy box and return to credit-business as usual. once the market re-stabilises the temporary liquidity-driven discounts will evaporate and the govt can lift the guarantee and/or sell at full price any assets it had to take on to its own books.

ie, costless

Earl Mardle

this is where I get lost again mate.

I can see that a mortgage is potentially a temporarily illiquid investment and swapping it for cash at something like face value makes sense in this environment. Although if the banks don't, or can't, then on-lend it for productive purposes, it means nothing.

But as far as I can see, they are also exchanging, at near face value, paper that has no actual asset backing at all.

If I take out a mortgage I can also take out an insurance to cover its payment (the old endowment insurance to pay it off was one of the early kinks that got us into this mess, especially when the "profits" from said insurance turned out not to be enough to pay off the mortgage)

You as the lender could insure the contract as well, both made sense and if the insurer went bankrupt it only mattered if I could not pay off the mortgage which, being prudent, I had geared to my actual possibility of doing so, not some fantasy wealth augmentation scheme.

However, it turns out that some of these contracts are totally dissociated from the assets. If I buy a policy from you that is based on my neighbour's mortgage (and I'm not a guarantor of that debt) and YOU pay ME if HE fails to pay his debt, then the status of our contract is a pure bet on a third party outcome.

It is exactly the same as betting on a horse or the lotto. From what I understand, a goodly bunch of these contracts are now being bought by the US government. But that Government has no way of ever selling them back to a market because, at least for the foreseeable future, nobody "gets" anything for the paper.

If I have a mortgage over your property, and you fail to pay, I can at least take ownership from you. If the mortgage exceeds the face value of the debt I can always hope to hang on till the inflation catches up again, but at least it is not a total loss -Turns out the ASB in NZ is now a major property owner because it has picked up the deeds on a whole pile of its non-performing mortgages which it has no immediate hope of selling on.

Now I can also see that, where mortgages have been bundled into CDS's, it makes sense for the government to buy them up and reassemble the slices into actual mortgages over actual property and good luck with unshredding those, but at least it is doable in principle and actually, for clarifying land ownership, it is necessary at a pretty basic level. Dana Blankenhorn managed to tet that one through my thick head.

But what I can NOT get my head around is why they are swapping money the US doesn't have for these ethereal bets on arcane calculations that can never be traced back to anything at all.

THAT's the bit I still need to have explained.


>However, it turns out that some of these contracts are totally dissociated from the assets.

the thing is, the "some" is actually proportionally quite small. in the uk, it's fuck all; in the usa, it's less than 10%. and even then, the underlying securitised property still has its original value, which is 90+% of the stated value even at the peak of the overheating. so consider a worst-case cost of 1% of nominal value assuming forced-sale by the us govt w/in 2 years. and there's nothing stopping them simply holding on for longer and taking advantage of the price pressure arising from growing population.

the drama is arising from wholesale players levering themselves up to fuck. when you're on a knife-edge of profitability, even small variations in default-rate will shoot you out the back door so fast it'll make your head swim and your bank crash.


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