Sep. 24th, 2008

firesion: (Default)
You and 100 other people buy a home for $100. These 100 loans are bundled together then divided by 500 and sold individually to 500 separate people. These 500 are each broken into 500 pieces and sold. The value of that home drops to $65 causing 20-80% of the people to default and pay nothing on the $100 loan. The people who have a claim on the house now equal 250,000. Since the contract is binary such that everyone gets paid or no one gets paid the value of the claim drops to 0 on the open market. You can not sell the thing you just have to wait to see if you get paid.

Now the people who have these debt products wan the government to purchase them. So the Gov will likely sell bonds to purchase all 250,000. The Gov will then own the 100 homes. The goal is to sell them back to the banks at a profit. However, the problem is the Gov is allowed to bid for bonds. Now if you own a bank and know you can buy an item for 65% of the value you will take it if you have the cash. However, banks have less cash then the Gov so they will always lose the bidding war.

If we are lucky the Gov will earn money on the investment by getting the cash flow from the remaining home monthly mortgage payments. In effect if the "Plan" is to raise taxes on the people who pay their home mortgage at the same time allowing the people who can not pay their loans and the banks to get a free ride to invest only in the best securities.

If you believe the Gov will give the money back to the tax payer at some point in the future you are a optomist.
firesion: (Default)
If someone in your presence says that the current financial crisis is like 9/11 you are constitutionally obliged to punch them in the face.

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firesion

January 2009

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