Why do you classify this as dumb. That was my first reaction too but, after a little thought, I'm not sure.
The $700B is to be spent to buy up bad paper which, at least as I understand it, are the packages of good & bad mortgages put together with an unknown value. It is also my understanding that the government would be able to buy these at a pretty steep discount to help with liquidity (since now valued at near $0). It has been stated that we stand to make a potential profit on re-sale once segregated.
If this is true, the government would own home mortgages that could have a face value of more than the home is currently worth. Either the Government could stick with the existing mortgage and hope the homeowner continues to pay and wait for the home value to go up/principal to go down and then re-sell it or they could try to dump it immediately at fair market value of the home (which is, hopefully, at or above what they paid for it).
If the mortgage will be resold at the current value of the home, why not "sell" it to the existing homeowner which, in effect, would be the renegotiation that McCain stated.
I am not a financial expert and would enjoy hearing from those that are what assumptions I got wrong; please feel free to pile on.
You understand incorrectly.
Bernanke is on the record as saying that buying the paper at what the market is currently pricing it (like, oh, $0.22 on the dollar of face value) would not re-capitalize the banks.
No, what Bernanke wants to do is buy the paper at some yet-to-be-determined “hold to maturity” value - which will likely be a whole lot closer to $0.80/dollar than $0.22/dollar of face.
This notion that the government could “turn a profit” on this paper is nice - but is ASSUMES that the paper is purchased at the current market values — fire sale prices. Buffett is on record as saying he thinks there’s certainly “more value than currently priced” into the paper. But is there $0.70/dollar or more? Well.... there’s the rub.
Paulson and Bernanke are lying like cheap rugs about the details of this plan. And as clearly seen in the bond markets to date, the bond market isn’t buying the supposed efficacy of the plan. There has been no slack seen in LIBOR. There’s now a plan afoot by the Fed to buy commercial paper - that wouldn’t be necessary if the Paulson bailout were working.
We’re going to take a soaking on the Paulson plan. Don’t believe a word of this “the taxpayers stand to make a profit” BS. That ASSUMES we buy the paper at fire-sale prices. We won’t be doing that. We’re going to be buying them at a hefty premium to the current market.
You got it right. These trolls, McCain haters, and doomsayers haven’t bothered to understand what McCain is talking about here. You did. Well said and done.
Why not instead facilitate consolidation of the mortgage shares, so that then individuals could take properties, appraise them, and figure out what to do with them?
If the mortgage will be resold at the current value of the home, why not "sell" it to the existing homeowner which, in effect, would be the renegotiation that McCain stated.
Rewarding bad behavior will beget more bad behavior. Guaranteed.