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Central Banks Float Rescue Ideas

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FT carrying the story today that we all have been predicting for at least a year.

Central banks float rescue ideas

http://www.ft.com/cms/s/0/a233faa2-f789-11...0077b07658.html

The only way out of the sorry mess that is the housing bubble is a mass bailout of the banking system with central banks not just lending against mortgage backed securities but actively buying them up to support the market.

Moral hazard all over the place - but its either this or meltdown of the entire banking system. Question is what price will they put on the MBS they buy in.

The idea here I am sure is to provide a mark-to-market price that is highly visible but high enough to shore up bank Tier 1 capital.

Edited by Wad

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The answer is for the Banks to stand on their own business model, if it fails the banks customers can simply be redirected to the national bank now owned by the people, Northern Rock.

Given that the money used by banks is in the main part taxpayers money that is lent to the banks who in turn lend it back to the taxpayer who owned it in the first place, with many middle men taking a cut on the way, its time for simplicity and common sense to return.

The Government should offer that money at that cheap rate directly to the taxpayers for mortgages, and the banks should become wholly dependent on depositors money, or fail like any other business at no cost to the taxpayer.

In my view, we as taxpayers didnt share in the banks profits, so we sure as hell should not be sharing in their losses.

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FT carrying the story today that we all have been predicting for at least a year.

Central banks float rescue ideas

http://www.ft.com/cms/s/0/a233faa2-f789-11...0077b07658.html

The only way out of the sorry mess that is the housing bubble is a mass bailout of the banking system with central banks not just lending against mortgage backed securities but actively buying them up to support the market.

Moral hazard all over the place - but its either this or meltdown of the entire banking system. Question is what price will they put on the MBS they buy in.

The idea here I am sure is to provide a mark-to-market price that is highly visible but high enough to shore up bank Tier 1 capital.

Nobody wants a collapse.

Paul Krugman has article here on it.

http://www.nytimes.com/2008/03/21/opinion/...amp;oref=slogin

For the UK would this bailout get shifted onto the tax burden ? (like Northern Rock)

What would happen to the gilt yields further out would they rise ?

http://www.yieldcurve.com/marketyieldcurve.asp

Edited by Ash4781

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In my view, we as taxpayers didnt share in the banks profits, so we sure as hell should not be sharing in their losses.

Actually, the banks does share it's profits as they are paying tax on it.

The other thing to remember is that in the US, the FED compelled banks to take on bad loans in the name of political correctness.

See here: http://www.nypost.com/seven/02052008/posto...3911.htm?page=0

HOW FEDS INVITED THE MORTGAGE MESS

By STAN LIEBOWITZ

<B>Did what gov't asked: Countrywide CEO Angelo Mozilo.</B>

Did what gov't asked: Countrywide CEO Angelo Mozilo.

PrintEmailDigg ItRedditPermalinkStory Bottom

February 5, 2008 -- PERHAPS the greatest scandal of the mort gage crisis is that it is a direct result of an intentional loosening of underwriting standards - done in the name of ending discrimination, despite warnings that it could lead to wide-scale defaults.

At the crisis' core are loans that were made with virtually nonexistent underwriting standards - no verification of income or assets; little consideration of the applicant's ability to make payments; no down payment.

Most people instinctively understand that such loans are likely to be unsound. But how did the heavily-regulated banking industry end up able to engage in such foolishness?

From the current hand-wringing, you'd think that the banks came up with the idea of looser underwriting standards on their own, with regulators just asleep on the job. In fact, it was the regulators who relaxed these standards - at the behest of community groups and "progressive" political forces.

In the 1980s, groups such as the activists at ACORN began pushing charges of "redlining" - claims that banks discriminated against minorities in mortgage lending. In 1989, sympathetic members of Congress got the Home Mortgage Disclosure Act amended to force banks to collect racial data on mortgage applicants; this allowed various studies to be ginned up that seemed to validate the original accusation.

In fact, minority mortgage applications were rejected more frequently than other applications - but the overwhelming reason wasn't racial discrimination, but simply that minorities tend to have weaker finances.

Yet a "landmark" 1992 study from the Boston Fed concluded that mortgage-lending discrimination was systemic.

That study was tremendously flawed - a colleague and I later showed that the data it had used contained thousands of egregious typos, such as loans with negative interest rates. Our study found no evidence of discrimination.

Yet the political agenda triumphed - with the president of the Boston Fed saying no new studies were needed, and the US comptroller of the currency seconding the motion.

No sooner had the ink dried on its discrimination study than the Boston Fed, clearly speaking for the entire Fed, produced a manual for mortgage lenders stating that: "discrimination may be observed when a lender's underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower-income minority applicants."

Some of these "outdated" criteria included the size of the mortgage payment relative to income, credit history, savings history and income verification. Instead, the Boston Fed ruled that participation in a credit-counseling program should be taken as evidence of an applicant's ability to manage debt.

Sound crazy? You bet. Those "outdated" standards existed to limit defaults. But bank regulators required the loosened underwriting standards, with approval by politicians and the chattering class. A 1995 strengthening of the Community Reinvestment Act required banks to find ways to provide mortgages to their poorer communities. It also let community activists intervene at yearly bank reviews, shaking the banks down for large pots of money.

Banks that got poor reviews were punished; some saw their merger plans frustrated; others faced direct legal challenges by the Justice Department.

Flexible lending programs expanded even though they had higher default rates than loans with traditional standards. On the Web, you can still find CRA loans available via ACORN with "100 percent financing . . . no credit scores . . . undocumented income . . . even if you don't report it on your tax returns." Credit counseling is required, of course.

Ironically, an enthusiastic Fannie Mae Foundation report singled out one paragon of nondiscriminatory lending, which worked with community activists and followed "the most flexible underwriting criteria permitted." That lender's $1 billion commitment to low-income loans in 1992 had grown to $80 billion by 1999 and $600 billion by early 2003.

Who was that virtuous lender? Why - Countrywide, the nation's largest mortgage lender, recently in the headlines as it hurtled toward bankruptcy.

In an earlier newspaper story extolling the virtues of relaxed underwriting standards, Countrywide's chief executive bragged that, to approve minority applications that would otherwise be rejected "lenders have had to stretch the rules a bit." He's not bragging now.

For years, rising house prices hid the default problems since quick refinances were possible. But now that house prices have stopped rising, we can clearly see the damage caused by relaxed lending standards.

This damage was quite predictable: "After the warm and fuzzy glow of 'flexible underwriting standards' has worn off, we may discover that they are nothing more than standards that lead to bad loans . . . these policies will have done a disservice to their putative beneficiaries if . . . they are dispossessed from their homes." I wrote that, with Ted Day, in a 1998 academic article.

Sadly, we were spitting into the wind.

These days, everyone claims to favor strong lending standards. What about all those self-righteous newspapers, politicians and regulators who were intent on loosening lending standards?

As you might expect, they are now self-righteously blaming those, such as Countrywide, who did what they were told.

Stan Liebowitz is the Ashbel Smith professor of Economics in the Business School at the University of Texas at Dallas.

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FT carrying the story today that we all have been predicting for at least a year.

Central banks float rescue ideas

http://www.ft.com/cms/s/0/a233faa2-f789-11...0077b07658.html

The only way out of the sorry mess that is the housing bubble is a mass bailout of the banking system with central banks not just lending against mortgage backed securities but actively buying them up to support the market.

Moral hazard all over the place - but its either this or meltdown of the entire banking system. Question is what price will they put on the MBS they buy in.

The idea here I am sure is to provide a mark-to-market price that is highly visible but high enough to shore up bank Tier 1 capital.

Float my ass, tax payer to foot bill

LONDON (Reuters) - Central banks on both sides of the Atlantic are in talks about the feasibility of mass purchases of mortgage-backed securities in a bid to solve the global credit crisis, the Financial Times said on Saturday.

The newspaper, without citing sources, said the talks were at an early stage and part of a broader exchange on how to battle the turmoil in financial markets, which has continued despite the injection by central banks of billions of dollars of liquidity and cuts in interest rates.

The Bank of England appears to be most enthusiastic to explore the idea, which would involve the use of public money to shore up the market in a key financial instrument, the FT said.

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Float my ass, tax payer to foot bill

LONDON (Reuters) - Central banks on both sides of the Atlantic are in talks about the feasibility of mass purchases of mortgage-backed securities in a bid to solve the global credit crisis, the Financial Times said on Saturday.

The newspaper, without citing sources, said the talks were at an early stage and part of a broader exchange on how to battle the turmoil in financial markets, which has continued despite the injection by central banks of billions of dollars of liquidity and cuts in interest rates.

The Bank of England appears to be most enthusiastic to explore the idea, which would involve the use of public money to shore up the market in a key financial instrument, the FT said.

If there is a ballot paper where I can put my mark against a candidate that says no to bailing out banks, then they'll get my vote.

The answer must be to bail-out (if absolutely essential), but make shareholders in banks lose their shares first. That way there will be a future disincentive to bankers, and they will be more prudent in future...

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What would the B0E do with those mortgage backed securities? Are they going to try to sell them on or insist the banks take them back after a set period, or what? Surely it is a dangerous step to take, gambling with the country's assets in this way.

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I think I heard it mentioned that there must be an act of congress if the Fed is to purchase securities like this from the banks...

Likely hat would be highly visible and take a looong time.. but I think it's what they'll do.

Edited by chris c-t

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If the government is going to bail out somebody, why the banks? Why don't they subsidise mortgages again so that homeowners and first time buyers don't get squeezed so much? I'm not saying governments should pump any money into the property economy, but if they do, why not rescue the borrowers rather than the lenders?

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there is no way the this goverment or any other goverment can truely take this risk

it would cost them anywhere from £250billion to £500billion.

they may try to swap mortgage debt for goverment debt like gilts. that way the banks hold some assets with a known value and confidense is returned to the banks.

slowly the banks would need to take their shit mortgage back.

hence insted of a fast potentially harmfull bust we are gona see a draw out bust (which imo is probably worse)

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The banks only need bailing to the tune of the recovery required to make their balance sheets legal and solvent.

Any more, than this, and its stupid lending time again.

Oh and the remuneration package for all participating banks should not exceed 50K per staff member while they are being bailed.

Oh and when they are done, they should be paying the treasury DOUBLE the tax take of every one else until every last penny is paid back, with INTEREST.

Oh and then they will write to every subject in this nation a personal letter of apology about what they have done.

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The Bank of England appears to be most enthusiastic to explore the idea, which would involve the use of public money to shore up the market in a key financial instrument, the FT said.

To borrow a phrase from Mr. Balls: So what?

We have the PFI and other govt. debt (160% of GDP and rising) and unless we declare gruel to be the new national dish, there is no chance it will ever be paid off.

Adding more debt to a pile that cannot be paid off isn't going to make a difference :ph34r:

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IMO the question is not IF the central banks will attempt a bailout. Next year- when the problems causing this are at thier very worst they will have to- the real question is CAN they. This hasn't even really kicked off yet and the Fed is about out of ammunition- what $400 billion so far? That enourmous sum has only slightly slowed the apocolypse. Is there enough money in the world to 'bailout' this mess? How much would it cost to sort, not just in the states and here- but all the bubble economies across the world, 20 Trillion? Less? More? If someone could put a credible number on all this and show the central banks could 'afford it' I would back a bailout. Otherwise its just pissing in the wind.

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All depends on the price. If the govt buys them at anything near 100% original face value, l'll shall buy a gun. If they get them for a steal because the banks simply can't sell them, then the govt/boe will make out like bandits when/if the economy recovers.

Yadda yadda l understand if no-one can buy it then its worth nothing, but its a bit philosophical. For example l have a golden goose that lays a £1bn egg once a year, but l need to sell it now because l have gambling debts l need to pay. If you couldn't afford to buy it off me does that make it worthless?

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  • 297 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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