Thoughts on the RTC Solution?

I'd like to hear some thoughts on the subject. I feel based on the released information it's bad course of action

NEW YORK (AP) -- Wall Street surged higher Thursday, with the Dow Jones industrials up more than 400 points after a report that the federal government is considering creation of a repository for banks' bad debt.
CNBC said Treasury Secretary Henry Paulson is considering creation of an entity like the Resolution Trust Corp. that was formed after the failure of savings and loan banks in the 1980s.

Investors were cheered by the notion of a huge federal intervention like the establishment of RTC to acquire the real estate debt that has hobbled financial institutions and led to the intense volatility in the markets this week

And of course the market swings 500 pts on the dow over this news...

Sounds like the biggest taxpayer funded bailout yet. My basic understanding of this idea is that the Federal Government would buy debt that these banks can't sell in the free market. I.E, the government buys the most toxic junk out there at a premium. The banks are saved, the taxpayer is on the hook, and the dollar probably cliffdives. $4.00 gas will seem like a bargain. The lesson learned for the financial industry is to take big risks, because if it works out you make a fortune, and if not you get bailed out. So we end up having to do this again in a few years.

hope69 said: Last time this happend the taxepayer was on the hook for Billions. This time around we are on the hook for Trillions with a T. Total mortgage debt is only about $10 Trillion ... for it to even get up ton $1 Trillion (never mind "Trillions"), 10% of all mortgages would have to be totally worthless. I don't think even 10% of all mortgages are in trouble, never mind being totally worthless. While the mortgage industry is a mess, it's not that big of a mess.

hope69 said: Last time this happend the taxepayer was on the hook for Billions. This time around we are on the hook for Trillions with a T. So, the lesson is: get as big as you can and take on as much risk as you can, it doesn't matter how much you screw up the taxepayer will be there to bail you out.

I am starting to lose faith in free market system.

Plus, does this mean the housing market will be back to what it was at the 2006 level?

I have lost faith in the politicians that run this country, but not in the free market system.

time to ban short selling! no wait, lets ban buying long! i mean no wait, lets ban oil going over 75$ a barrel, no wait, lets just ban the stock market all together like russia did for the past 2 days! capitalism and democracy live on! god bless USA! proud to be an american!

ban oil going over $75!!

we can artificially manipulate the country back into a global superpower! DOW to 20,000 and beyond!!!! why stop at 20,000, dow to 200,000 and beyond! BAN selling stock!! once you buy you can never sell!

chimeer said:
I have lost faith in the politicians that run this country, but not in the free market system.

Comrade Bernanke Does it Again

Beckles said: hope69 said: Last time this happend the taxepayer was on the hook for Billions. This time around we are on the hook for Trillions with a T. Total mortgage debt is only about $10 Trillion ... for it to even get up ton $1 Trillion (never mind "Trillions"), 10% of all mortgages would have to be totally worthless. I don't think even 10% of all mortgages are in trouble, never mind being totally worthless. While the mortgage industry is a mess, it's not that big of a mess.

You are forgetting that it is leveraged.

Too bad The Maverick will have to clean up this mess.

You are 100% correct Asharerin. Why would any bank sell there level 3 assets at 10-20-30 cents on the dollar?

Most of the banks just like the government know that most of the MBS bonds will end up paying closer to 80-95 cents on the dollar as more than likely most people will end up paying there mortgages just fine. So the banks would be much better off just holding them to maturity and considering the average maturity for a MBS is 7 years and we are already 1-3 years into most of the option arm MBS which were written in 2004-2007(which are the toxic ones as home owners are upside down and can not refinance currently) means that with in 3-6 years most of them will end up being paid off.

The only reason the Feds wants to take these so called "bad assets" off the banks balance sheet is to free up bank capital so they will start to make new easy loans at lower rates which in effect will accelerate the payoff of those MBS. So banks that are not desperate for cash will be unwilling to sell there assets to government at a huge discount.

In my opinion what would make more sense if the government want to offer easy low cost loans to unqualified buyers would be if the government started to issue mortgages. By doing that in turn would accelerate the redemption of the so called toxic MBS that the banks are holding. Problem is Paulson is not that stupid he understand who ever is the last sucker to lend money to all those unqualified buyers is going to be left holding the bag. The reason the bank originally gave those loans to those unqualified buyers was because they believe home values would continue to go up and those buyers would just keep refinancing into new teaser loans so they ultimately would not end up holding the bag but because the housing market took a down turn that made it impossible for those borrowers to refinance there homes into a new teaser rate and banks got stuck holding those mortgages from unqualified buyers.

I do not think the banks are dumb enough to sell there assets cheap to government and then go and start giving those non qualified buyers new loans to keep the bubble going for a while as this is still fresh in there mind.

Notice how when the government comes out with cooky bailout the higher interest rates go up mortgage because the banks are not going to loose tons of money on there current mortgages and not pass along those losses to new borrowers.

I was able to lock a 5.125% 15 year 0 point mortgage from Citi on Tuesday. Penfed has 5.125% with 0% the same day too. Same mortgage today is up to 5.5% from Penfed and 5.75% from Citi with no points. In 2 days mortgage rates went up 37.5 to 62.5 bps. That is because of AIG bailout and Fed so called RTC solution which is no solution for the banks really as it does not solve the problem with all those borrowers being unable to afford there homes unless they are given teaser rates of 1-3% on there loans.

Beckles said: I'm not sure that's all that accurate. These instruments have already been heavily written down, but even at their drastically reduced values they're still illiquid. Many institutions will be more than happy to dump them for a fraction of face value for cash, the problem right now is no one is willing to pay cash for them, in particular because everyone is in the same boat and can't take on more of the same risk.

Bank have to mark to market there assets each month because Sec rule FAS 157. Mark to Market is really BS in most cases. Think of it this way. You have a brokerage account in that brokerage account you have 10k shares of XYZ Stock that you bought last month for $45 per share. Today that stock is valued at $10 per share. If you don't sell the stock today what have you lost? Nothing but if you were a bank you would have to disclose you lost $35k on that investment. And then if next month that same stock is back up to $50 per share you would have to disclose you made $40k on that investment. Well if you don't sell that stock next month and choose to hold it for another month it could go back down too.

Banks have some MBS which currently are still preforming(ie they are paying interest coupon to the bank) but no one is willing to buy them because many of the homes that are guaranteeing those mortgages are now upside down so the collateral is worth less than the loan amount and because of that fact no one is willing to buy them currently because on any homes they foreclose on they will loose money. So because of that fact only people willing to buy those MBS currently are only willing to pay 20-30 cents on the dollar. If the banks do not sell the MBS but keep them till maturity more than likely the bank will loose no more than 10-15% which really means they will still make money after you factor in the interest they collect vs the amount they wrote off against non preforming loans just not as much if all the loans preformed.

That is why I do not think many of the banks will be willing to dump them at fire sale prices as they are much better off just holding them till maturity. The problem the government has with that idea is because they holding them till maturity and they have written them down so much that is basically draining the banks of all there capital so they are unable to make new loans which is hurting the US economy.

dolmar said: Beckles said: I'm not sure that's all that accurate. These instruments have already been heavily written down, but even at their drastically reduced values they're still illiquid. Many institutions will be more than happy to dump them for a fraction of face value for cash, the problem right now is no one is willing to pay cash for them, in particular because everyone is in the same boat and can't take on more of the same risk.


Bank have to mark to market there assets each month because Sec rule FAS 157. Mark to Market is really BS in most cases. Think of it this way. You have a brokerage account in that brokerage account you have 10k shares of XYZ Stock that you bought last month for $45 per share. Today that stock is valued at $10 per share. If you don't sell the stock today what have you lost?

Coffee, meet keyboard.

We have a respected FW member that subscribes to the "You dont lose until you sell" crock and pretends that margin calls do not exist.

Well, in combination with protecting our money market funds, and protecting our financial institutions by banning short selling against them temporarily, it sure as heck is having a huge positive impact on the market. I am very pleased, personally, with the short term extraordinary pop we are going to have today. Insuring money markets will be done at a fee, as all insurance is done. And premiums usually cover losses in the insurance business. We shall see.

Dealguy123 said: The last one dealt with assets of banks that went bankrupt. This RTC 2.0 looks to be dealing with banks THAT AREN'T EVEN BANKRUPT?!That's what I don't understand. The government is supposed to establish a set of rules and ensure everyone play by the rules honestly, and ensure orderly unwinds of failed companies. This RTC2.0 seems to be a result of very hasty decision making processes.

I am going to the track today.

I will bet $2 to win on every horse in every race. I will keep all of my winnings. I expect everyone on this board to give me a dime toward every bet I make, you will cover every one of my losing tickets. A 30% tax on my winnings will be returned to you.

Today's bets will cost you collectively $100. I should win roughly $90 today. I will return $27 back to you. I will keep the other $63 to do with as I please.

Tomorrow, we will do it again.

It is the new American way, reward with no risk.

Beckles said: EvilCapitalist said: That's not the issue. The issue is that the cashflow from the mortgage has been repackages via MBS and derriviative instruments. The underlying may mortgage cashflow may change just a bit, but the devastation it would create in the financial instruments based on it is much higher.You still can't get more than $100,000 in losses on a $100,000 mortgage. The repackaging means that if the mortgage is paid 90% there may be derivitives with that mortgage that absorb the entire 10% that is lost while other derivitives remain whole, but a $100,000 mortgage can not create more than $100,000 in losses across all its derivitives, even if it becomes completely worthless.

How uncreative. Margin is your friend ( or in this case, your enemy ).

EvilCapitalist said: Bank have to mark to market there assets each month because Sec rule FAS 157. Mark to Market is really BS in most cases. Think of it this way. You have a brokerage account in that brokerage account you have 10k shares of XYZ Stock that you bought last month for $45 per share. Today that stock is valued at $10 per share. If you don't sell the stock today what have you lost?

Coffee, meet keyboard.

We have a respected FW member that subscribes to the "You dont lose until you sell" crock and pretends that margin calls do not exist.

I am not claiming margin calls do not exist but margin call issue is another issue and has nothing to do with the banks current positions or credit crunch. Commercial Banks have a limited amount of capital and can only create a limited amount of credit against that capital. If they are unable to sell the current mortgages on there books they are unable to underwrite and fund new mortgages.

Margin calls did not put the commercial banks in the current position. Margin calls might effect hedge funds, investment banks and private individuals who levered up there positions because they made bets larger than they could afford but they are just as guilty as the home buyer who bought homes they could not afford thinking there equity would increase and they would either be able to refinance there home after a year into a new teaser rate mortgage or a fixed rate product.

So not sure about your point of trying to compare margin consequences to FAS 157 requirements. Commercial banks made a large chunk of there money underwriting mortgages and then selling them and not buy holding them to maturity as they underwrote those mortgages with 20-50 bps spread over what there cost of funds are. So in banks opinion holding those mortgages till maturity is a waste of capital and takes away profit from the bottom line going forward.

ClaimsGuy said: DavidScubadiver said: And premiums usually cover losses in the insurance business. We shall see.

Wrong. Very few companies make an underwriting profit.What are you talking about? The entire insurance industry is based on premiums covering losses, that the premiums are paid before the losses are incurred and the insurance company profits on the use of the money in the interim.

nycll said: Dealguy123 said: The last one dealt with assets of banks that went bankrupt. This RTC 2.0 looks to be dealing with banks THAT AREN'T EVEN BANKRUPT?!That's what I don't understand. The government is supposed to establish a set of rules and ensure everyone play by the rules honestly, and ensure orderly unwinds of failed companies. This RTC2.0 seems to be a result of very hasty decision making processes.Yes, it was hasty. But the haste was necessary. People have no idea what it would mean for a company like Goldman to go under. Business was going to come to a screaming halt. They took emergency measures and sure, some people got hurt and got hurt real bad as a result. These were the people taking advantage of the fact that they could drive prices down by selling declining stocks short and by spreading rumors about the financial health of these companies, further exasperating the problem.

Was it a perfect solution? No. But did it keep Goldman's stock from disappearing? Seems to have done the trick. These Goldman guys are great people. They make a lot of money but that is no reason to hate. They fund great businesses. People need them to raise capital. This was all needed.

Edited: They should never have lifted the uptick rule. Put it back so this does not happen again. And again.

DavidScubadiver said: nycll said: Dealguy123 said: The last one dealt with assets of banks that went bankrupt. This RTC 2.0 looks to be dealing with banks THAT AREN'T EVEN BANKRUPT?!That's what I don't understand. The government is supposed to establish a set of rules and ensure everyone play by the rules honestly, and ensure orderly unwinds of failed companies. This RTC2.0 seems to be a result of very hasty decision making processes.Yes, it was hasty. But the haste was necessary. People have no idea what it would mean for a company like Goldman to go under. Business was going to come to a screaming halt. They took emergency measures and sure, some people got hurt and got hurt real bad as a result. These were the people taking advantage of the fact that they could drive prices down by selling declining stocks short and by spreading rumors about the financial health of these companies, further exasperating the problem.

Was it a perfect solution? No. But did it keep Goldman's stock from disappearing? Seems to have done the trick. These Goldman guys are great people. They make a lot of money but that is no reason to hate. They fund great businesses. People need them to raise capital. This was all needed.

Another brainless post. I don't give two s**ts about the "no shorting" rule, we weren't even discussing that. If you didn't see that coming yesterday, sucks for you. What we were talking about wasn't the "no shorting" but the bailout plan, which hasn't passed yet. The government is literally raining down money on everyone. Bail out money market funds, RTC 2.0, Freddie/Fannie, Bear Stearns, AIG, etc. The list goes on and on. I could careless about the no shorting! The REAL problem is the "printing" of money to bail everyone out, and WE THE TAXPAYERS EAT THE LOSS!

I get a lot of red, and I understand that people think this is unfair. But think for a moment what life would be like if the government let the last of the independent investment banks fail -- one that was not stricken by the toxic housing losses, one that made it possible for business to take place. It would have been bad. Thousands of people would have lost their jobs, we'd go into a deep deep recession and the stock market would have collapsed. Goldman is the ONE company that is synonymous with sound investing, and if they fail, nobody succeeds.

A counter proposal to the U.S. Treasury Department's $700 billion Wall Street bailout plan was released Monday by the office of Sen. Christopher Dodd, the Connecticut Democrat who chairs the Senate Banking Committee. Linky.