Bailout Cost?

Paulson went around to the weekend morning talk shows in Washington.

When asked about the expense of buying bad mortgages from the reckless lenders, Paulson cautioned that the $1 Trillion expense that the treasury is putting up won't necessarily loose all that money. What they will get with that money are "illiquid assets" that will eentually be liquified.

Oh. So how much will the these mortgages eventually sell for -- how much is the american tax payer going to loose on these mortgages?

"The price you will get for those assets will be based upon how the economy does, the pace at which the housing markets recover," he said.

OK.

So the bubble drove prices above affordability. Prices are starting to drop, but are still well above affordability (thus the defaults and foreclosures!) and Paulson wants the US tax payer to buy up all of these mortgages and then hold their breath until housing costs return to their peak values?

How is this good?

Let's say family X makes $200K/year and they bought a $1.5M house with an option ARM two years ago with some obscenely low teaser interest rate (2.5%?). The option resets, the interest rate goes up to 10% and now the $12K/month mortgage is too expensive. Family X will default on their loan and "the bank" will have to foreclose. Nevermind that $1.5M is more than family X can afford -- their foreclosure will put a house on the market that "the bank" needs to sell in order to recover some of its losses.

"The bank" is either some stoopid wall street broker, or wamu, or wachovia. Or "the bank" is the US Treasury.

If it's the US Treasury, then there are a few scenarios that could play out. 1) Maybe they decide to let family X keep their house but pay a lessened interest rate. 2) They foreclose. 3) They let family X keep their house for a little while, paying less interest, and then foreclose a year or two down the road.

All three options represent money taken from my pocket.

Option 1). The treasury borrows money to buy family X's mortgage and has to pay interest on this debt. Family X isn't paying the full load of the interest. The difference they're paying is coming out of my pocket in current and future taxes.

Option 2) The treasury buys the mortgage at $1.5M and sells the house at $1M. Half a million of taxpayer money disappears, to be made up for by higher taxes now and in the future.

Option 3) The treasury borrows money to buy family X's mortgage, and pays the difference in their interest rate on this borrowing and the interest that family X pays. This difference is footed by me. Then the treasury forecloses. Since the treasury delayed selling in a falling market, the house is now worth $750K. $750K of taxpayer money has evaporated.

Shouldn't taxpayers also have the right to extract revenge on the rich bankers that will walk away from this bubble with fat pockets? The salaries they earned in the years leading up to the bubbles' burst left them with a sweet pot to ride out the impending depression. Can't we take that money from them? Shouldn't there be class action lawsuits against the firms that caused this disaster?