Lehman

[snoopy369]

Hmm, i'm starting to get confused myself here. What does leverage do in this context?

[Kidlicious]

DanS is on his own. I'm starting to see things PLATO's way.

[PLATO]

Originally posted by GePap


Wouldn't the free market be the only way to figure out a "reasonable price," and thus make the idea of the government coming in to buy these securities at this point when their value isn't set wrong? Why not wait until the market sets the reasonable price for his crap, and then have the government jump in to buy at firesale prices?

We have been waiting nearly two years and there is no real market for these. The secondary mortgage market is all but dead.

And to whom exactly would the government sell these things to afterwards? That would be the only way for the government to profit, but if no one in the private sector is willing to buy these things at their current pricing now, how the hell will the government get a higher price later, unless the government forces all the banks to lower the price of these securities extensively, thus still crashing the balance sheets of these companies and possibly making them bankrupt anyways.

Stabilization of housing prices and liquidity returning to the markets will create a market for these instruments. In addition, the vast majority of defaults occur within the first 36 months of a mortgage loan. Most all of them are approaching that figure.

[DanS]

Originally posted by snoopy369
Hmm, i'm starting to get confused myself here. What does leverage do in this context?

Small swings in the price of the underlying asset have outsized impact on the price of the mortgage-backed security.

[Aeson]

Banks need capital to keep their over-leveraged asses above water. No one is willing to buy what they have at retail prices. Prices are cut to try to entice buyers (or simply to meet bids). That is what these assets are worth now. Because "worth" not only means the underlying asset's intrinsic value (as if that could be actually determined) in our economy. It also includes how much someone wants/needs something... whether that be capital from a sale, or what's being sold in a purchase.

It's why a pair of jeans can sell for $400+. It's why a bank can charge someone 22%+ interest on a credit card. Banks usually make out like bandits on this principle...

[Alinestra Covelia]

Yech. I've lived with some bandits and it's no fun making out with them.

[Aeson]

That's why you aren't a banker?

[Alinestra Covelia]

No, I'm not a banker because anything you give me, I'll probably blow.

[rah]

*cough*

[Colonâ„¢]

What's up with the omnipresent misspelling of "treasuries" in news stories these days? They didn't used to write it as "treasurys" quite so often, did they?

[DanS]

I think it's an acceptable alternative spelling. Perhaps even the preferred spelling.

[snoopy369]

http://en.wikipedia.org/wiki/Talk:Treasury_security#Spelling

I suppose that makes sense... both are technically inaccurate of course, but Treasurys = "Treasury"s where "Treasury" is treated like a brand name.

[notyoueither]

Originally posted by DanS


As you should well know, it's not that simple. What's the leverage on the tranches that were swept under the rug at 22 cents on the dollar?

Could you explain how mortgages could be worth less than 30% of their face value?

Granting the burst bubble, and the haircut taken at sale on the courthouse steps, less than 30% is an absurdly low number.

What else is affecting the value of the 'junk?' That's what I've never understood.

[DanS]

Sure. Let's pretend that the leverage on a mortgage-backed security is 10-1, meaning that I put in 10% cash, borrow 90% from the money markets, and buy mortgages with the proceeds. If the underlying mortgages decline by 10% or more in value, the mortgage-backed security is worthless.

When Plato says that even foreclosed houses sell for a high portion of the borrowed price, he is of course correct. But that doesn't mean that particular mortgage-backed securities are anything but worthless, given the leverage baked in to some of them and the suspect quality of the underlying mortgages.

Although this is an artificially simple example, this is basically how it works.

[notyoueither]

How is the mortgage backed security worthless?

If the homeowner defaults, you take the property back and sell it, through the courts.

There is fundamental value there.

Unless, are you saying that the holder of the mortgage has a mortgage on the mortgage? Then let the middlemen take the bath and let the ultimate owners of the asset realise the value. Too simple, yes?