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October 01, 2008


My favorite 'graph: "The changes in the bill were measurable by volume. The initial proposal from the Treasury Department ran just three pages; the latest version exceeds 450."

I'm just glad McCain voted for it rather than flip-flopping on another issue, voting no, and launching a new gimmicky denunciation of the Bush-Obama-Paulson-Pelosi-Wall Street conspiracy to suck money from the heartland.

Then again, voting for it won't necessarily prevent McCain from running against it.

isn't the size difference (3 - 400+) due to the fact (rumor? myth? vague precedent?) that spending bills must originate in the House ? therefore, this Senate bill is "a whole bunch of stuff the Senate wanted anyway plus the bailout" ?

I can't wait for that Mine Rescue Tax Credit to get extended (sec 310 of this beast), that will really help all the struggling Mine Sweeper Teams in my community get back on their feet. Thank you so much DC! You just saved Christmas.

I'm hearing there's a bit of pork in that sausage. The Man Who'll Make Earmarkers Famous voted for it anyway. Oh well, I suppose he'd veto it, if he were President.


"isn't the size difference (3 - 400+) due to the fact (rumor? myth? vague precedent?)"

It's a technicality easily gotten around the same way they did this time: dig up some old bill from the House that's in suspended animation, and slap whatever tax provisions you want onto it in the Senate, and voila, a bill that doesn't "originate" in the Senate -- technically.

The rest of your query is answered in the linked Times story, and every other story published on the bill. Heck, it's in what Hilzoy quoted: "coupled with an array of popular additions."

[...] In the House, officials of both parties said they were increasingly confident that politically enticing provisions attached to the original bill — including $150 billion in tax breaks for individuals and businesses — would win over at least the dozen or so votes needed to reverse Monday’s outcome and send the measure to President Bush.


Besides the tax breaks, senators also made a change that had drawn widespread support in recent days — an increase in the amount of bank deposits covered by the Federal Deposit Insurance Corporation, to $250,000 from $100,000. And the entire package was attached to legislation requiring insurers to treat mental health conditions more like general health problems — a long-sought goal of Mr. Domenici and other lawmakers who demanded such parity.


In the end, Senate leaders decided to overcome some of the ideological and political resistance that doomed the measure in the House with the tried-and-true Congressional approach of stuffing the bill with provisions that would make it hard for many lawmakers to resist.

“All I’m trying to do is get this thing passed,” said Senator Harry Reid, Democrat of Nevada and the majority leader, denying he was trying to jam the House by giving members no choice but to accept the tax proposal he favored or again reject the bailout.

The multiple tax breaks, called extenders in the Capitol because they renew or extend expiring tax benefits, appeal to many lawmakers and could provide a political argument for backing a bill that has otherwise been very unpopular.

Instead of siding with a $700 billion bailout, lawmakers could now say they voted for increased protection for deposits at the neighborhood bank, income tax relief for middle-class taxpayers and aid for schools in rural areas where the federal government owns much of the land.

“This bill has been packaged with a lot of very popular things to give it even more momentum,” said Senator Jeff Sessions, a Republican from Alabama, who is an opponent.

The approximately $150 billion in new tax breaks, which offer incentives for the use of renewable energy and relieve 24 million households from an estimated $65 billion alternative-minimum tax scheduled to take effect this year, would be offset by only about $40 billion in spending cuts or tax increases elsewhere.

Etc. Etc.

So this old wallflower of a bill that had attracted no romance on its own, is now in a shotgun marriage with the most unpopular legislation to come down the pike in a long time. Put the two of them together and they get through the Senate with legs. Makes perfect sense. In an alternate Universe.

He'd veto it, and You Would Know His Name.

"In favor, but without any enthusiasm" seems like a popular stance. On NPR this afternoon they had Andrew Kohut with a poll that says people are evenly divided on the bill, and everyone puzzled over the contradictory observation that calls to Congress are overwhelmingly against it. It didn't occur to anybody that the kind of support the bailout enjoys isn't the kind that motivates people to call their representatives: "Please tell the senator that although I think this is a pretty bad idea, it's probably better than doing nothing, and none of the alternatives that would be better on the merits are politically feasible under the present circumstances."

As I've said, I'm in favor, but without any enthusiasm.

By all means save the enthusiasm for something else. Can't waste any enthusiasm on something as mundane as keeping the world's economy from completely crashing.

It must be nice to live in such a bubble.

Gosh, ken, why no congratulations -- you being a Democrat, and all -- to Senator Reid for getting this bill passed? Surely -- as a Democrat -- you must be as thrilled at Senator Reid's accomplishment as you were dismayed at Nancy Pelosi's "failure" to get the Republicans to obey her bidding?


Where's your enthusiasm, ken?

I'm against it, but also without much enthusiasm.

I really wanted Swedish meatballs with equity sauce and cramdownberry jelly, not overcooked trashbrowns with bacon on the side.

Gary, I am very pleased with Reids leadership in getting this bill passed.

Now I expect Pelosi to redeem herself and get it passed in the House. If she can't then she is not worthy of being Speaker.

"Now I expect Pelosi to redeem herself and get it passed in the House. If she can't then she is not worthy of being Speaker."

Will the Minority Leader bear any responsibility for the Minority? Or in your view, that position just doesn't exist?

Pretty much what TLTIA said, only without the Scandanavian luvvin'. Not that I have anything against the Scandawhosians -- I'm partially one myself -- just that I'm craving different fare tonight :)

I still fear the Swedish Chef will be appointed to execute the plan (I steell feer zee Svedeesh Cheff veell be-a eppueented tu ixecoote-a zee plun).

the fact (rumor? myth? vague precedent?) that spending bills must originate in the House ?

People keep saying that, and I'm somewhat mystified. The Constitution says that bills for raising revenue must originate in the House. I would not have thought that this bill could be characterized as "raising revenue".


People keep saying that, and I'm somewhat mystified.

the article i linked to says that the House itself tends to claim, and the Senate tends to agree, that it must originate spending bill as well as bills that raise revenue. there must be some basis for that - maybe it's just tradition ?

The rest of your query is answered in the linked Times story, and every other story published on the bill.

the 'query' was basically rhetorical.

"Raising revenue" is generally interpreted as "tax bills", applying to tax cuts and modifications as well as tax increases, and this bill definately has to do with taxes, so I'd say the clause applies.

But the courts don't enforce any of that procedural stuff, quorum requirments, both houses having to actually pass the same language, you name it, so the issue is moot in our post-constitutional age.

Listening to "Morning Joe" this morning while getting ready for work, I could not believe it when I heard the $700 billion bailout became an $850 billion business-as-usual pork-filled monstrosity.

I'm trying to find better links. But I hope this will do for now.

The Senators looked like heroes last night. Not now.

Filling this bill with earmarks for auto racing tracks and wool research is a disgrace.

The bailout bill is supposed to rescue us from our collective financial insanity and, to do so, the Senate fills it up with more reckless spending.

I suspect this will give the House Republicans more reason to dig in and, if they spin it right, now they will look principled.

Maybe I'm missing something.

I hope so. Because this whole mess makes me wonder what's wrong with this country -- doesn't Congress know the whole frickin' world is watching?

doesn't Congress know the whole frickin' world is watching?

Well, there's http://news.bbc.co.uk/2/hi/europe/7647729.stm>this... And let's not forget http://www.spiegel.de/international/world/0,1518,druck-581502,00.html>the mockery Bush underwent at the UN.

OT but tangentially relevant: Regarding Credit Default Swaps, it is my understanding that one can insure against (i.e. bet on), say, my defaulting on my mortgage, even if one does not hold my mortgage. So, to anyone who might know, does it then follow that a number of people can purchase(?) Credit Default Swaps against the same debt instrument? In other words, is it possible that, say, ten different individuals can bet that I'll default and all be entitled to a payout, and that the sum total of those payouts might far exceed the value of my mortgage?

Getting the renewable energy tax credit ... renewed and getting some AMT relief are nice pluses.


My guess would be that this bill allows Treasury to raise revenue by issuing bonds (govt debt).

The Senators looked like heroes last night. Not now.

Well they looked like heros to themselves and the courtiers in the press. I just couldn't take even the sound bites from the "debate" I heard. All back patting and preening on how wonderfully bipartisan this all is, and let's get along.

Who knew that Nader was right all along?


I believe that is correct. Similarly, you and I can place a bet - excuse me, enter into a futures contract - on the price of pork bellies even if we keep strictly kosher and would never have anything to do with pork bellies.

The horse is probably out of the barn, but I'll ask another in a no-doubt endless series of dumb questions:

Why don't we just buy the mortgages?

Not the securities, the mortgages themselves.

Yeah, I know, moral hazard, but don't we have bigger fish to fry?

thanks -

russell, I think you'll have difficulty getting political support for a plan like that. Wall Street entities are faceless and in some sense invisible, but anyone who either rents a house or who owns a house but borrowed responsibly is not going to like handing over buckets of cash to people who gambled and lost. I can already imagine the ads now: all you'd have to do is find some slimy house speculator who flipped a dozen properties but got stuck with the last one and talk about how he made N dollars in profit and was going to lose the whole thing until the government stepped in and saved him. I wouldn't want to run my reelection campaign in the face of ads like that.

Also, the bit about reducing payments by giving the government a stake in the homes seems problematic to me. It requires that the government make a bet as to what the long term value of individual houses is going to be, which seems very hard (no less hard than trying to price lots of MBSs). And what happens if the government decides that the property sucks and that it doesn't make financial sense to buy the property? Now you have the government effectively owning large chunks of property by paying cash for costs it will never recoup; the homeowners get really cheap rent effectively. This does not seem good to me, but maybe I'm missing something.

The more I read about the Senate bailout bill the less I like it.

anyone who either rents a house or who owns a house but borrowed responsibly is not going to like handing over buckets of cash to people who gambled and lost

I don't mean (and I don't think the folks who wrote the article meant) pay off the note and hand the keys to the owner.

I mean pay off whoever holds the note now and then the US holds the mortgage.

We (collectively) end up holding a lot of mortgages, but it's short(ish) term. If folks have a hard time paying, we can renegotiate terms to keep them in their houses without devaluing any securities.

What's the downside?

Thanks -

OK here another simply atrocious aspect to the TARP plan which I just stumbled upon courtesy of Yves Smith and her merry band of commentors.
It may make the liquidity problems in the Main St. economy worse rather than better.

Here’s my best non-economist restatement of this problem in plain English:

The market for commercial paper (corporate debt issued by large and medium sized companies to deal with their short term cash needs) is freezing up in part because investors who under more normal circumstances would be buying CP are instead fleeing to Treasuries as a safer haven. If Paulson goes shopping for MBS using yet more Treasuries, it will make this problem even worse by dumping large amounts of new T’s into the short-term end of the credit market and sucking up dollars that otherwise might go into buying commercial paper.

Here’s a metaphor: if you think of the economy as being like a car, with the Main St. economy being the chassis and drive train, and the credit market as being the engine, then the market for commercial paper is like the transmission – it is one of the key points where the two systems connect with each other. And what the TARP plan will do is to add oil to the engine, but at the cost of draining the transmission fluid from the transmission. The result could be that even if the engine runs more smoothly it will be unable to provide power to the drive train because the transmission has seized up.

Note that I chose an automotive metaphor because one of the Main St. consequences will be this: Analysts - Nearly 1 in 5 car dealerships could fail

The alarming thing about the Congressional debate over this plan is that all of the analytical stuff I'm reading now suggests that the details of how and when Paulson uses that $700 are crucial and could make the difference between muddling thru and a fiasco, yet none of those details are being discussed or debated - they aren't even in the bill at all. Noboby knows what Paulson is going to do with that money, and nobody in Congress is even asking him.

Hey Hilzoy, you were asking for some more in-depth stuff on why I feel the way I do.

Read this link...

Also, understand that the crisis with municipal funding has been part of the permanent crisis, and something the higher-ups have felt they could put on the backburner indefinitely. The extent that they are being talked about now is merely a propaganda angle as an example that the public accepts as being deserving of bailout help.

Furthermore, the main cause of the crisis isn't that they can't access the money market or other debt markets but that falling housing values and corporate tax reciepts have put a crater into the municipality's ability to pay back loans. The cause is not irrational fear, but more that we KNOW they can't pay. Thus, the bailout bill will not help municipalities much. A direct recapitalization of municipalities by the central government is what is needed here.

Now I expect Pelosi to redeem herself and get it passed in the House. If she can't then she is not worthy of being Speaker.

Yes, it's long past time for Pelosi to fire those underperforming Democratic representatives and hire new ones.

Yves Smith doesn't know what she is talking about.

First of all it is unlikely that this will be funded by short term T-bills in its entirety. More likely it will be funded with upsized auctions across the curve.

And secondly the problem with commercial paper is a confidence problem and has nothing to do with crowding out by the treasury. Until confidence returns between borrower and lender the treasury could reduce its auctions to zero and the problem with commercial paper is still not solved.

Wow, and I thought I'd be the first with the link.

Also, I'm not confident in offering alternative plans, because at root, the issue is probably that fraud made up a larger part of the bubble than it usually does. You can't really do anything about fraud. Once someone steals alot of cash, it's usually gone, and most responses consists of closing the barn door after the horse is gone.

The really big issue is that something does have to be done quickly, and everyone is playing rentseeking games: Bush, with his autocratic demands for dictatorial power, the House, with it's adherance to crazy ideological conflict a la Gingrich, and the Senate, which has porked that bill up pleeeeeeenty...


Not sure I buy it, entirely. Right now CP is seen as unusually risky, hence few buyers, high rates. Reduce the risk premium, as TARP should, and CP is again seen as a fairly safe short-term investment, money comes in, and rates drop.

That's not to say that borrowing $700 billion won't raise Treasury rates, and thus exert some upward pressure on CP, but will it really offset the reduced risk?

jeez, ken, if yves doesn't know what she is talking about, then I think you'd have to make more sense than *that*. That was gobblygook.

In any event, if the treasury reduced the auctions to zero, then the banks would HAVE to increase transparency and find out who is solvent. If they don't trade at all, then they're insta-dead. Which implies there wasn't really any hope of a solution, man. They'd just suck on the government teat until they bring down the government's rating.

ken: [I] doesn't know what [I] is talking about.

Fixed that for you.

Hrm. Yves Smith or ken? Tough call...

From LeftTurn's first link:

"I think it's very telling that in two days of hearings and two weeks of discussion we have yet to see *any* detailed mechanism for how Paulson's plan will increase the supply of, say, inventory loans. It's not that every economist in the world is an idiot, it's just not going to help. I think people have fallen into the fallacy that if it costs a lot it must be valuable. Paulson's plan falls into the category of very expensive way to hurt ourselves."

The longer this thing goes on, it seems we keep getting reasoned analysis that suggests we are getting a rush job.

Sure, the markets need liquidity -- like yesterday. But a bad plan is a bad plan.

I don't see how the House Republicans -- the House Dems for that matter -- will see this as a better bill than the one they killed Monday.

Maybe Paulson is a big part of the problem.

Can I ask my dumb question again...

Would it work if we (US government) just bought out the mortgages -- not the securities, the mortgages -- and held them ourselves?

The securities derived from the mortgages would then be sound. We could then work out whatever terms we liked with the homeowners, and hold the mortgages until they were paid off or any defaulted properties were sold.

I'm sure it would still be a mess, but it would unplug the credit markets and let us (US government) sort out the housing stuff in our own good time.

This may, in fact, be a collossaly stupid idea, but I'm not an econ guy, so I don't see why.

Like everybody else, I'm just trying to figure this all out.

Your thoughts?

Thanks -

That was gobblygook.
shahB, In other words you don't understand and are too proud to ask for an explanation.

Here it is again. Simplified.

1) Yves Smith says that the bailout will be funded with T-bill. T-bills are short term (under one year obligations auctioned) once a week. The rest of the Treasury borrowing is done in the form of T-notes, (2, 5 &10 year maturities) and T-bonds (30 year maturities) and are auctioned quarterly, or semiannually in a regular schedule. Only someone who does not understand the treasury auction scedule and the different maturities (curve) would say that the 700 billion dollars is going to be funded entirely with T-bills.

A more likely funding structure would be to match liabilities (borrowing) with assets (investmenst) bases upon the duration of the securities purchased. Duration matching is a very plain vanilla risk management technique that no one at the Treasury will need to have explained to them.

BTW, the term 'across the curve' means taking into account all the maturities, not limited to just one maturity.

2) Yves Smith says that this T-bill borrowing, which as explained above is unlikely to occur, will crowd out commercial paper driving the cost for corporations higher.

But this is wrong because the problem is one of confidence, not cost. It is not the borrower who is unwilling to borrow the money, at any cost, it is the lender who is unwilling to lend, at any price. Cost has nothing to do with it.

Jon Schwarz has two excellent posts that provide further perspective on points raised in comments here:

1- I steell feer zee Svedeesh Cheff veell be-a eppueented tu ixecoote-a zee plun.

Zee Svedeesh Cheff vass-a beeg port orf cooking opp dee prublum.

2- In a sad irony, the Senate vehicle for the bailout is this year's revival of Paul Wellstone's signature/legacy legislation to provide mental health funding. Read the comments as well as the post.

Nell - could you explain the irony? I was just happy they finally got it through.


Here's my response. If the govt pays off all existing mortgages it is essentially buying the relevant mortgages - not the MBS (see below), at par. This would, on the whole be a huge subsidy to many MBS holders. Whatever their total market value, it's not par.

Not incidentally, it would also be a highly unevenly distributed subsidy, because the bits and pieces into which the mortgages are sliced vary greatly. To take a simple case, some slice might involve receipt of all interest payments made on a pool in the first ten years, while another might involve receipt of the matching principal payments. (Things are probably more complex than that now, but let's just work with this example.) Now the value of these two securities depends, inter alia, on the rate at which the mortgages are paid off as borrowers refinance, sell, etc. If they do so quickly the holder of the principal tranche is happy, if slowly it's the interest tranche that gets to be valuable. So pay them off in one swoop and you are sort of randomly handing out pain and bonanzas.

But that's parenthetical. Pay all mortgages off and refinance them and you have assumed the default risk without being paid for it. And of course the people most likely to take advantage of the plan are likely defaulters. The reason the MBS are "toxic" is because of the high and uncertain default risk. That's why you buy them at a big discount. So there would be massive overpayment, and to the extent the new mortgages defaulted the govt would take a loss.

Under the plan as I understand it the govt is going to buy the MBS at a price that (really, no matter what they say) is above market value, but well below par. To the extent it overpays it may recover the loss on the warrants it gets.

If it were logistically possible, and I doubt that it is, it would be reasonable to allow borrowers to buy from the govt the little chunks of MBS that are based on their own mortgages at some markup to what the govt paid. There would also be giant and likely unsolvable adverse selection problem with this, so it's a fantasy, I guess.

Sorry if I added to the confusion.

From Nell's line: "It's like the world's investment bankers dug up Wellstone so they could punch him in the face one more time."

This whole bailout bill has gone terribly, terribly wrong.

bedtimeforbonzo - Sorry, I must be dense. How is passing the bill like punching Wellstone in the face?

@david kilmer: The irony is that the bill hands $700 billion to Henry Paulson, to be handed out to banks and investment houses at a still-completely-unclear price level for their trashiest tranches of overleveraged mortgage-backed securities.

And we don't even get any stock warrants if the amount is $100 million or less, so I'd expect that to be gamed immediately by banks offering the trash in $99 million imcrements.

Paul Wellstone was not one to let the perfect be the enemy of the good, but it would have to be painful to know that his dearest cause is only now passing because Wall Street is holding a gun to the head of the Congress.

"From Nell's line: "It's like the world's investment bankers dug up Wellstone so they could punch him in the face one more time.""

Except that as commenters there point out, getting Wellstone's bill achieving mental health and addiction treatment parity mandated in insurance and HMO plans (as I vaguely understand it) is a great achievement that supports Wellstone's legacy. It's to be applauded, not decried.

Noted as ironic, perhaps, but not regretted.

ken: "Now I expect Pelosi to redeem herself and get it passed in the House. If she can't then she is not worthy of being Speaker."

Me: Will the Minority Leader bear any responsibility for the Minority? Or in your view, that position just doesn't exist?

ken: *crickets*

Nell - I guess I see. I would have preferred a more Krugman/Soros type of approach, myself. Hopefully there will only be 4 months of $99 million dollar handouts.

Democracy is a clusterfsck. But it's *our* clusterfsck :)

I hope Senator Wellstone would have been happy that the bill passed. I know that we among the mentally ill are. Insurance has been rough.

"we (US government) just bought out the mortgages -- not the securities, the mortgages"

I'm no economist either, but A) what's the difference between the securities and the mortgages here, and B) isn't that equivalent to just paying the banks full face value for loans that are never going to be paid back? Isn't that exactly what we're trying NOT to do?

"I know that we among the mentally ill are. Insurance has been rough."

No insurance is no piece of cake, either.

Though I'm immensely grateful for the State of North Carolina program that will see me getting mental health treatment for 9 months. Though after that, I'm on my own again. Sure hope I'm cured in time!

Re Wellstone bill & mental health insurance:

This worries me a tad. I'm about to try to buy health insurance on the open market. From what I've read, the likeliest reason for me to be denied is mental health -- so my hope was to buy a plan that explicitly excludes mental health coverage. But it sounds like the Wellstone bill might prohibit such plans ...

Apologies for the self-interested nature of this post. If the Wellstone bill results in Gary getting health insurance, I'll willingly forgo my own half-a-loaf.

Ken, you are a deeply silly man, if man you are, and not some pizza-face somewheres dining on mom's bon-bons.

I mean really...

Missing the entire poing of Yves' post and crowing that that she doesn't know what she's talking about. *Then* going on all smarmy on me and making assumptions about what I do and do not know that are obviously not well considered.


I do understand the terms you have used in your "point". I also understand that you don't really understand what those terms mean in this situation, and that, frankly, your opinion was irrelevant.

1) Yves was promoting an opinion by FairEconomist. He should be the guy you're lambasting, if it's a he, of course...

2) Do you actually understand what would happen if Paulson actually match fed note maturities with mortgage debt note securities? As in you would crash the damn curve, man! So besides flattening and threatening inversion of the curve (and pushing the unwinding of carry trades even faster!), that would drastically increase the *expense* of the bailout! We'd get even less bang for our very inefficient buck.

2 b) Cost have everything to do with it. The lender refuses to lend because the price of the asset that undergirds much of their value, housing, is falling. More than that, the central conflict of a liquidity trap is that the predominant interest rates are not a high enough price for secure lending, but higher interest rates lowers the value of the capital stock. Now, various booster morons have been claiming that all of these bankers are wusses and runing around scaredy cats because of nuttin'...One little mouse is all.


There is a reason for the crisis, and the bankers are panicking for a good reason, and we will not stop them from panicking by telling them that they are delusional with a little hush up money.

3) Lastly, you refuse to comprehend that the underlying issue is transparency, transparency, transparency. As in this crisis does not go away until mark-to-market discipline has been enforced on all of the affected security. The idea in the here and now is to break things in gently and try to instill it without unnecessary trauma. No confidence builder in the world is going to help until the black-hole securities have been stuffed for good.

eh, enough pearls for you...

@russell (and Turbulence):

Here are two economists proposing the buyout of the mortgages underlying the over-leveraged securities. Turb, in this case the mechanism is pretty clear, but I imagine you'll hate the moral hazard.

I'm frankly more worried about moral hazard involving Goldman CEO Blankfein and his counterparts at the remaining big banks.

aargh. Here's the link: a Washington Post op-ed from yesterday.

The reason the MBS are "toxic" is because of the high and uncertain default risk.

In total only about 1.2 trillion dollars in sub-prime and alt-a loans were made.

Not to long ago, in a fire sale, Merrill Lynch sold about 800 million of these at the fire sale price of 22 cents on the dollar to a private investment fund that expects to see double that or more for holding the paper until the market recovers.

So at the fire sale price of 22 cents on the dollar the entire 1.2 tillion dollars is worth about 265 billion dollars.

Currently only 25% of the mortgages are in default and the homes have been or will be foreclosed on. Typical recovery to the note holder is significantly more than half, but for the sake of argument let's peg recovery at 50%

Also let's say that, as the worst case scenario, half of the loans eventually default.

So if half the loans default that means that the balance will pay off a total of 600 billion out of the 1.2 trillion originally loaned. This is significantly higher than the 265 billion dollar fire sale price of these assets.

And if on the defaulted loans the recovery is half that would be another 300 billion paid to the note holders.

So in a hold to maturity/recovery situation the full 1.2 trillion in troubled loans would be worth 900 billion (leaving aside the the cash flows until payoff).

So if the treasury pays somewhere between the fire sale price of 22 on the dollar and the price assuming a fifty percent default rate of 60 cents on the dollar the treasury will own a portfolio of securites whose hold-to-maturity value is close to 900 billion dollars for which it paid perhaps 600 billion.

I the default rate goes much over 50% then we have a problem far far bigger than just a housing downturn. From what is known of the behaviors of large pools of borrowers it would take an economic recession bordering on a depression for that to happen.

The Treasury can afford to pay the full 700 billion to buy up the entire 1.2 trillion dollars in 'toxic loans' and still have a better than even chance of making a profit on the deal. It will all depend on what happens with jobs and the economy over the next two to five years.

Ken's comment above fudges the difference between the mortgages themselves, and the securities in which they are now embodied (sliced, diced, and tranched).

Do you actually understand what would happen if Paulson actually match fed note maturities with mortgage debt note securities?

It's called duration matching and duration is not the same as maturity.

A duration match on liabilities to assets could consist of a broad array of treasury obligations ranging from bills to bonds. As long as the overall duration matched the assets overall duration the risks (interest rate, not credit) are mitigated.

You talk about curve flattening and inversion like someone who hasn't a clue. It is not the UST that sets curve yields, it is the market that sets curve yields. And as I explained before the UST is unlikely to overload the market in any one part of the curve. So instead of your feared inversion we would get more than likely an upwards shift in the entire yield curve. Either that or a steepening.

And if it wasn't Yves Smith who wrote that nonsense as I understand it she thinks it makes sense, so I stand by my statement that Yves Smith hasn't a clue.

And when and how did your pet peeve of tranperancy become a bone of contention between us? I never mentioned it.

The discussion was about commercial paper, short term loans from overnight to 270 days. You think the freezing up of the commercial paper market is based upon a lack of transparency? And it all relates back to mortgage assets?

To a limited extend you have a point. But that doesn't explain why IBM and JNJ have just as much difficulty selling commercial paper as does everyone else. They certainly have no MBS exposure.

Anyway my argument was not with you but with whoever penned that nonsense about the TARP driving up the cost of commercial paper and making it more difficult for businesses to get decent funding.

That is just lunacy.

I can't really answer someone who willfully doesn't get it. Just can't. It's plainly obvious that ken doesn't have a dynamic appreciation of what's going on, maybe to the point of fail cause and effect.

So all right. You win.

Ken's comment above fudges the difference between the mortgages themselves, and the securities in which they are now embodied (sliced, diced, and tranched).

Nell, explain how you see it, unfudged.


Could you maybe clarify your argument a little? Ken seems to be saying that the cause of high CP rates is a high level of perceived risk, and that reducing that perceived risk will bring those rates back to historical levels relative to Treasuries. He further argues that the "crowding out" effect will not be significant.

At least that's my understanding. Ken can correct me if I'm wrong.

As a comment of mine above suggests, I find this plausible, at least.

Can you explain why you don't?

"The more I read about the Senate bailout bill the less I like it."

Beg pardon, but with endless number of world-class experts online, you go to the Bucks County Courier Times for your financial analysis? The "the economist from the South Jersey college"? Is this a joke?

Ken: "Now I expect Pelosi to redeem herself and get it passed in the House. If she can't then she is not worthy of being Speaker."

So, Ken, will the Minority Leader bear any responsibility for the Minority? Or in your view, that position just doesn't exist?

Do you think people don't notice if you don't answer? Do you also think that you're invisible if you shut your eyes?

Bernard -

Many thanks for the excellent and thoughtful reply. It was helpful.

Thanks -

This is a horrible idea


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