My Type of Rescue Package

I have yet to fully understand the complete falling of the U.S. economy; however, sensical evaluations can determine what has really occurred. Much of the naysayers would have chosen to blame the default on the housing crisis, and that may have been a cause of the economic upheaval, but if looked into further, one would see that much of the blame surrounds structured financial products, credit derivatives, & credit default swaps. Wall Street has intermediated the design of credit derivatives which is protection against a "credit event", much of the basic necessity evolved into traded credit default options. It is a tool to separate the inherrent risk on a set of Asset Backed Securities (ABS) such as Collateralized Debt Obligations, specifically, Collateralized Mortgage Obligations (CMO) which are a pool of mortgage loans securitized and sold. Credit protection was added to these securities to protect against a credit risk, such as bankruptcy, or foreclosure. It would seem to me that as the issuance of this type of protection increased, so did the risk increase.

The idea of loan syndication is the spreading of the risk amongst several investors. It was widely believed that with the spreading out of risk, would've meant safer investing for buyers of these securities, including the global arena. However, much of that risk was layered with more risk. With the increase in loan origination in the real estate market, the more prices grew. And as prices increased, even insomuch that area median income was more than doubled to be able to afford these homes, exotic products such as no income, no doc loans developed. I remember Arnold Swartznegger referring to them as "NINJA" loans, "No Income No Jobs or Assets" loans. In the mortgage industry they were widely known as "NINA" loans, "No Income No Asset" loans. It meant the same thing. You could write up an application, ask the applicant for their net income, and in many cases lenders would allow you to increase that up by say 10%-25%. And now, when these NINA loans are set to adjust, there comes no ability to do so, because the loan products in the past few years are no longer available, credit scores are higher, full documentation on all loans is now required, and assets are required. Some mortgage originators may feel stiffed.

The fact of the matter is that subprime loans amounted to $1 Trillion dollars of mortgages, compared to between $10 Trillion & $11 Trillion in junk bonds issued. With the advent of junk bonds into the market, it had created a risk into the system at increasing numbers from 2003-2007.

With all this talk about off balance sheet capital requirements, it should be noted that a credit derivative is an instrument issued off balance sheet. And when it is issued, it has a term of 1 year and 1 day in some cases which allows the collateral to remain as a "contingent asset". The risk that is associated with that credit derivative is written on balance sheets, and therefore allows a commercial bank to issue more debt. One of the loopholes that monoliners whom issued these protections knew is that there is no requirement to set aside capital loss reserves equal to the risk. They knew this and that's why credit default derivatives were issued so much.

It's as if the monoliners or issuers of these derivatives just issued the protection with no provisions. After all, with the Triple A rated security and protection, why should there need to be capital loss reserves? To that end I say TO PROTECT INVESTORS who bought these securities against loss. What were they thinking?

Now with this economic rescue package, the federal reserve will be able to setup an auction facility to purchase these bad assets to enable various banks to survive and to be able to infuse more capital to be able to make more loans to keep the economy going, employment, etc. These facilities will be able to assist in "Price Discovery" of these bad securities. Why? Because no one knows what they are worth, what their price is......

So what does that mean for the regular consumer? To be equally as fair to the homeowners as the banks, I would say to allow them the same abilities to "price discover" their homes. Buyup all the bad houses on the market sitting in inventory so some of us can refinance our mortgages with better terms. Better yet, please start in Sacramento, then work through the Bay Area. I mean afterall, don't you think that's fair for us? Helping out Wall Street is a necessity just as much as helping Main Street with our inability to price homes effectively.