U.S. Congress Votes Against Bailout

[CentreHice]

One bank slogan that typifies what I'm talking about is Scotiabank's: "You're richer than you think...."

No offense intended at Scotiabank per se....but it's a classic example of leaning people toward over-extension. Higher credit card limit, line-of-credit against your home, home-equity loan, etc.

I'm just talking about the average person here....and there are a lot more of them than there are financial wizards who are adept at using other people's money to turn a profit.

I also know that the slogan also refers to building wealth using their financial planners....so it's not all "evil"...

[MC Habber]

Strange bedfellows pulled the plug on bailout bill
Tuesday, September 30, 2008 | 04:18 PM ET
By Henry Champ

I would have thought spotting the Loch Ness monster would have been more likely than watching some of the coalitions of congressmen and women that lined up to defeat President George W. Bush's $700-billion bailout package Monday.

There was Democrat Peter DeFazio of Oregon, voting no.

So did Virgil Goode of Virginia.

DeFazio is a progressive, voting for government intervention in health care, labour, education and the environment. He opposes the Iraq war, free trade agreements and tax cuts.

Goode is very conservative Republican. He was first elected as a Democrat but was thrown out of the party when he supported the impeachment of Bill Clinton. He was overwhelmingly re-elected as a Republican, running on a record of opposition to abortion, gun control, same-sex marriage and gay rights.

'I don't buy it'

In the run-up to any House vote, members are given a couple of minutes to outline their support for, or their opposition to, the legislation being considered.

Here's what these two men said.

First DeFazio:

"We started here a week ago with the Paulson plan. It was simple. Give them the keys to the treasury and suspend all the laws. What we're doing or proposing here today is infinitely better. The Democrats have laboured hard to put in taxpayer protections and provide consequences for Wall Street executives.

"But what we consider today is still built on the Paulson-Bush premise: That is, President Bush and his Treasury Secretary Mr. Paulson say dumping $700 billion of taxpayer finance debt – and buying up Wall Street's bad bets – will solve the liquidity problem. It will trickle down through the economy to benefit small business. It will solve the underlying problem with the housing market and it will stem job loss.

"I don't buy it. There are less expensive, less risky, targeted regulatory forms and programs that could work better. But bottom line, President George Bush and his Treasury Secretary Henry Paulson insisted on a top-down Wall Street bailout solution.

"It's sort of like the financial surge strategy. And just like the surge in Iraq, as we go into it at the outset, we know it's not sustainable and we know it won't solve the underlying problems.

"Even worse, President George Bush and Secretary Paulson and the Republicans insisted upon watering down the most critical portions of the bill. There is no mandatory way to pay for his bailout. No fee, no tax, just a proposal from a future president to a Congress that a Congress might think about to help take taxpayers off the hook.

"That's not protection. The golden parachutes, yeah they were exchanged for camouflage parachutes. The executives on Wall Street are still going to get millions – look at the loopholes there. … We can do better. We should start again on a new package, come back next week."

Now Goode, in a much shorter statement:

“I will be voting no on this measure because this is a bad-day approach that will not save America. We need to infuse capital into our banking system and not more federal debt. Federal debt is not the way to go. We also must look at the fundamental cost of encouraging those who have little chance to repay, to get loans. Over-encouragement was a fundamental cause and it is not addressed in this bill. I hope we will vote no for a better day and a better bill.”

'Stunning' lack of political courage

On this Tuesday morning after, the blame game is everywhere.

The Democratic leadership says the Republicans failed to deliver votes from the GOP caucus they had promised. This charge comes despite the fact 95 Democrats like DeFazio voted no as well.

Republicans say Speaker Nancy Pelosi's floor speech just before the vote was wildly partisan and a bitter attack on the Bush administration. The Republican leadership said many of their members changed their vote at the last minute because of it.

Goode was going to vote no, regardless of who spoke.

The Washington Post has an editorial this morning blaming some no-voting House members whose "lack of political courage is stunning. Perhaps their votes will help them get what they want in November, a return trip to Washington."

Neither DeFazio nor Goode lack courage.

Nor is there any chance they will lose in November. Both could leave on a long holiday and still get elected.
Listening to voter anger

Blaming members of either party is not going to get this resolved. The situation is more simple and direct.

President Bush sent over bad legislation that is not passing the smell test with American voters. His efforts on television and radio to win support have been lacklustre. He is mired in lame-duckism. Nobody is listening.

His surrogates, Paulson and Federal Reserve Chairman Ben Bernanke, have not convinced the public they have the right answers or have earned the trust to administer the bailout.

The Democratic and Republican leadership allowed themselves to be steam-rolled into quick actions. The loopholes in some areas of the bill are colossal. The anti-"golden parachute" clauses do nothing to prevent clever companies and their executives from circumventing them. The mechanisms to ensure the public gets profits in the future are constructed with Lego blocks.

All of these people made one big mistake.

They didn't listen to the American people.

DeFazio and Goode did.

This is going to get solved at some point. It will go faster if the lawmakers take a moment and read what DeFazio and Goode said in their speeches to the House.

www.cbc.ca/news/reportsfromabroad/champblog/2008/09/strange_bedfellows_pulled_the_1.html

[The New Guy]

Frankly, I think all this doom and gloom is a bit much. The markets are in trouble - of that there can be little doubt. But frankly I agree with the economists who encourage people not to panic. Every once in awhile the market goes through a contraction. It happened in '98. It happened in '87. It's the nature of the stock markets.

The stock markets are kind of like a giant, legalized pyramid scheme. People put in money at the bottom so the people at the top can take it. The people at the bottom then wait a little while until there are more people below them, and they can take out their money plus a profit and go back in at the base of the pyramid again. Of course the problem with a pyramid scheme is that if you don't have folks putting money in at the bottom, then the people at the top can't take their money out.

Of course it's more complex than that. But at it's root it's really quite simple. And right now people are nervous and don't want to kick in the money at the bottom of the pyramid. But eventually they will. They always go back.

As for the bailout package - well, I think it was a stop-gap anyways. The US Government is playing fast and loose with investor confidence, and that might not be the way they want to play it right now, but honestly it would just get people to kick back into the market for another couple years. Of course an economic collapse would likely be easier to handle if there wasn't an impending presidential election.

Interesting fact, however. Black Monday 1987 the DJIA dropped 22.6%. Black Monday 1929 dropped 13% (and it dropped a similar amount on the following Tuesday). Yesterday? 5%.

I'm not worried. Low risk investments (I'm young and both me and my wife have GIC's and plain old savings accounts (we wanted to keep it low risk to be able to purchase a house in a year or two)) and I work in an insulated field in an insulated industry (I'm an IT worker with a firm that supports accounting/management software). My wife is even more insulated. Academia is like that. I'll make it through. Now, if I were planning on retiring next year I'd be planning on changing that choice shortly, but for now - nah, not worth worrying about yet. Not even close.

[Cranky]

Wow, the sun rised in the east and set in the west....and the world didn't end. Who knew!

I'm having a real problem the last few years. Every time I turn on the news, I keep yelping "bullsh!t" at the talking heads. It could be my advanced age....

[Habs_fan_in_LA]

The market IS legalized gambling.
If you aren't sitting in the boardrooms or on the Wall Street trading floor spending 16 hours a day gathering insider info, you are at a big disadvantage.
The odds favor the casinos in Vegas and the insiders in the stock market.
Trying to guess daily/hourly is a futile exercise.
If you do have an opinion about the long term value of a company, by all means invest for the long term, but playing the market and paying commissions is futile. Experts are great at telling you what happened, but useless guessing whet will happen tomorrow. They are right less than 50% of the time.

[Disgruntled70sHab]

Guess the bailout proposal passed in the Senate. I have mixed feelings on this to be honest.

HFLA, here's an article I found that pretty much explains your "casino" reference.

======================================================

U.S. 'casino' mentality blamed for meltdown, foreign leaders say

By Alan Clendenning, THE ASSOCIATED PRESS

2008-09-30 18:05:00

SAO PAULO, Brazil - Astounded by the U.S. government's failure to resolve the financial crisis threatening the foundations of the global free market, fingers of blame are pointing at America from around the planet.

Latin American leaders say the United States must quickly fix the financial crisis it created before the rest of the world's hard-won economic gains are lost.

"The managers of big business took huge risks out of greed," said President Oscar Arias of Costa Rica, whose economy is highly dependent on U.S. trade. "What happens in the United States will affect the entire world and, above all, small countries like ours."

In Europe, where some blame a phenomenon of "casino capitalism" that has become deeply engrained from New York to London to Moscow, there is more of a sense of shared responsibility. But Europeans also blame the U.S. government for letting things get out of hand.

Amid harsh criticism is a growing consensus that stricter financial regulation is needed to prevent unfettered capitalism from destroying economies around the globe.

And leaders of developing nations that kept spending tight and opened their economies in response to American demands are warning of other consequences - a loss of U.S. influence globally and the likelihood that the world's poor will suffer the most from greed by the biggest players in global finance.


"They spent the last three decades saying we needed to do our chores. They didn't," a grim-faced Brazilian President Luiz Inacio Lula da Silva said Tuesday.

Even staunch U.S. allies like Colombian President Alvaro Uribe blasted the United States for egging on uncontrolled financial speculation that he compared to a wild horse with no reins.

"The whole world has financed the United States, and I believe that they have a reciprocal debt with the planet," he said.

It's harder for European leaders to point the finger directly at the United States since many of their financiers participated in the recklessness. London was home to the division of failed insurer AIG that racked up huge losses on credit-default swaps, and many reputable European banks disregarded risk to load up on higher yielding subprime assets.

But the rejection by lawmakers Monday of the U.S. bank bailout proposed by Treasury Secretary Henry Paulson provoked a sharper tone and warnings that America must act. Though global markets on Tuesday recovered some of the ground they lost in a worldwide slide the day before, politicians from Europe to South America insisted the risk of a further plunge remains high.

German Chancellor Angela Merkel called on U.S. lawmakers to pass a package this week, saying it was the "precondition for creating new confidence on the markets - and that is of incredibly great significance."

In an unusually blunt statement from the 27-country European Union, EU Commission spokesman Johannes Laitenberger said: "The United States must take its responsibility in this situation, must show statesmanship for the sake of their own country, and for the sake of the world."

The crisis also has strengthened voices in France and Germany calling for EU regulations to eliminate highly deregulated financial markets, despite objections from Britain, which along with the U.S. is considered by some to practice a freer form of "Anglo-Saxon" capitalism.

"This crisis underlines the excesses and uncertainties of a casino capitalism that has only one logic - lining your pockets," said German lawmaker Martin Schulz, chairman of the Socialists in the EU assembly. "It also shows the bankruptcy of 'law of the jungle' capitalism that no longer invests in companies and job creation, but instead makes money out of money in a totally uncontrolled way."

The U.S. government's failure to apply rules that might have prevented the crisis is seen as a betrayal in many developing countries that faced intense U.S. pressures to liberalize their economies. In some developing countries, state enterprises were privatized, currencies were allowed to float against the U.S. dollar and painful measures were taken to bring down debts.

These advances are at risk now that credit is drying up. Countries with commodities-based economies are particularly vulnerable since more industrialized nations could reduce their demand for everything from soy to iron ore.

"It doesn't seem fair to me that those of us who endured so much hunger in the 20th century, who began to improve in the 21st century, should have to suffer due to the international financial system," Silva said. "There are going to be a lot of people going hungry in the world."

Just before meeting with Silva on Tuesday, Venezuelan leader Hugo Chavez said he believes a new economic order is in store for the planet.

"What's to blame? Imperialism, the United States, the irresponsibility of the United States government," said the self-avowed socialist and frequent U.S. critic. "From this crisis, a new world has to emerge, and it's a multi-polar world."

China's influence in the outcome of all this could be profound because it is a huge investor in U.S. debt. It is already calling for strict new international regulatory systems to apply to globalized financial markets.

Liu Mingkang, chairman of the Chinese Banking Regulatory Commission, said Saturday before a weeklong bank holiday in China that debt in the United States and elsewhere has risen to dangerous and indefensible levels.

The rest of the world is taking notice. Many newspapers made references Tuesday to China's increasing importance in global finance. In Algeria, a large cartoon on the front page of the newspaper El-Watan showed Uncle Sam at prayer: "Save us!" he says, kneeling before a portrait of China's Mao Zedong.

money.canoe.ca/News/Sectors/BanksFinance/2008/09/30/6934546-ap.html

[Habs_fan_in_LA]

I'm not a very smart guy, but would you buy bad loans for more than what banks are willing to pay for them and then justify it by saying you are paying what they are worth.
What is your home worth?
a) My family lives in it, sleeps in it, we have good neighbors and good schools. It's worth a lot to me.
b) If you and your family live in Kingston, a house in Los Angeles is worth something only if you vacation there once a year or think you can buy it for a specific amount and sell it for more than taxes and the interest cost of holding it.
c) My neighbor sold a similar house for $650,000. We all thought it was worth$800,000. Four years ago it was worth $300,000. It's probably lost value to $580,000 in the last two months. Does any of this make sense to you?
There is an intrinsic value to you and your family based upon the utility of the property. There is a speculative component based upon what you think some poor soul is going to have to pay you in the future.
Part of it is utility and part is speculative gambling.
Why are we bailing out losing gamblers? So they can continue to gamble some more?
If Ford can't sell cars because the public can't get a loan, let the government guarantee loans, not help out banks by buying bad debts.
If the Ford dealer can't get a business loan to stock/buy cars from Ford, guarantee his loan, don't buy the banks other bad loans.
Time for business to start using cash reserves for payroll, inventory, parts and raw materials. We are way too deep in debt. Spoken like a true conservative who isn't in debt.

[Disgruntled70sHab]

Oct 2, 2008 14:29:42 GMT -5 Habs_fan_in_LA said:

I'm not a very smart guy, but would you buy bad loans for more than what banks are willing to pay for them and then justify it by saying you are paying what they are worth.
What is your home worth?
a) My family lives in it, sleeps in it, we have good neighbors and good schools. It's worth a lot to me.
b) If you and your family live in Kingston, a house in Los Angeles is worth something only if you vacation there once a year or think you can buy it for a specific amount and sell it for more than taxes and the interest cost of holding it.
c) My neighbor sold a similar house for $650,000. We all thought it was worth$800,000. Four years ago it was worth $300,000. It's probably lost value to $580,000 in the last two months. Does any of this make sense to you?
There is an intrinsic value to you and your family based upon the utility of the property. There is a speculative component based upon what you think some poor soul is going to have to pay you in the future.
Part of it is utility and part is speculative gambling.
Why are we bailing out losing gamblers? So they can continue to gamble some more?
If Ford can't sell cars because the public can't get a loan, let the government guarantee loans, not help out banks by buying bad debts.
If the Ford dealer can't get a business loan to stock/buy cars from Ford, guarantee his loan, don't buy the banks other bad loans.
Time for business to start using cash reserves for payroll, inventory, parts and raw materials. We are way too deep in debt. Spoken like a true conservative who isn't in debt.

Whatever the bailout was supposed to do it obviously didn't make a difference to the TSX. That fell over 800 points today.

money.canoe.ca/News/Economy/2007/09/24/4521768-cp.html

[The New Guy]

Oct 2, 2008 19:12:31 GMT -5 Disgruntled70sHab said:

Whatever the bailout was supposed to do it obviously didn't make a difference to the TSX. That fell over 800 points today.

money.canoe.ca/News/Economy/2007/09/24/4521768-cp.html

The reason for the TSX taking a nose-dive is because Merrill-Lynch (the same Merrill-Lynch that is reeling from being heavily invested in this sub-prime nonsense) changed their rating of "Buy" to "Underperform" on Potash Corp, causing anyone invested in fertilizer to quickly pull out of the market. One analyst. Working for an investment bank which should at this point have zero credibility. But people are frightened now, and consequently things like this tend to have bigger shockwaves.

Still not terribly worried. If I was in the market I'd probably even buy up some PotashCorp while it's cheap. PotashCorp sells fertilizer to predominantly Asian markets - India and China I believe - and so probably isn't going to be hurt much by the economic instability in the states

However, some food for thought - an article from the New York Times:

query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

This article was written almost ten years ago. September 30, 1999.

[Habs_fan_in_LA]

Oct 2, 2008 19:12:31 GMT -5 Disgruntled70sHab said:

Oct 2, 2008 14:29:42 GMT -5 Habs_fan_in_LA said:

I'm not a very smart guy, but would you buy bad loans for more than what banks are willing to pay for them and then justify it by saying you are paying what they are worth.
What is your home worth?
a) My family lives in it, sleeps in it, we have good neighbors and good schools. It's worth a lot to me.
b) If you and your family live in Kingston, a house in Los Angeles is worth something only if you vacation there once a year or think you can buy it for a specific amount and sell it for more than taxes and the interest cost of holding it.
c) My neighbor sold a similar house for $650,000. We all thought it was worth$800,000. Four years ago it was worth $300,000. It's probably lost value to $580,000 in the last two months. Does any of this make sense to you?
There is an intrinsic value to you and your family based upon the utility of the property. There is a speculative component based upon what you think some poor soul is going to have to pay you in the future.
Part of it is utility and part is speculative gambling.
Why are we bailing out losing gamblers? So they can continue to gamble some more?
If Ford can't sell cars because the public can't get a loan, let the government guarantee loans, not help out banks by buying bad debts.
If the Ford dealer can't get a business loan to stock/buy cars from Ford, guarantee his loan, don't buy the banks other bad loans.
Time for business to start using cash reserves for payroll, inventory, parts and raw materials. We are way too deep in debt. Spoken like a true conservative who isn't in debt.

Whatever the bailout was supposed to do it obviously didn't make a difference to the TSX. That fell over 800 points today.

money.canoe.ca/News/Economy/2007/09/24/4521768-cp.html

What is shows us is that we all live together on this planet.
If the US Elephant rolls over, the Canadian mouse better get out of the way.
If your neighbor is selling his house for $650,000, don't bother listing yours for $950,000.
If you can't get a loan to buy a new truck, Ford better stop manufacturing 600,000 of them a year.
If the Saudis sell their oil for $60 a barrel, Suncor can't price theirs at $140.
During the annual NHL draft, the teams are trading up or down based upon what the other 29 teams do.
Players salaries are based on what players on other teams get.
Sundin's value is based on what other FA's are available.

[Habs_fan_in_LA]

The Senate passed the bill.
The House passed the bill.
The President signed it.

Now What?

Who gets how much for what?
Who decides?
How many government financial analysts are needed to sift through the incredably complex details? Where do they come from or how many will fit on the head of a pin?
What are the guidelines?
How are the guidelines interpreted?
Oversight?
Yogi Berra: "It ain't over until it's over!"

[franko]

Do you know how much fun I could have with this from a proper biblical perspective?

Jesus talked more about money that He did any other topic . . . and the "righties" would be shocked to know that He isn't in their corner!

[Disgruntled70sHab]

Oct 3, 2008 14:37:53 GMT -5 Habs_fan_in_LA said:

The Senate passed the bill.
The House passed the bill.
The President signed it.

Now What?

Who gets how much for what?
Who decides?
How many government financial analysts are needed to sift through the incredably complex details? Where do they come from or how many will fit on the head of a pin?
What are the guidelines?
How are the guidelines interpreted?
Oversight?
Yogi Berra: "It ain't over until it's over!"

It's hard to know just how much of a difference this will make. I can't shake this bad feeling I have over the whole process. I think this bailout might make things worse. I can't really explain that or provide any details, just a feeling.

Cheers.

[BadCompany]

Okay financial wizards, tell me if this accurate;

The Canadian government just announced they are buying up $50 billion worth of mortgages. Let’s assume the average mortgage balance is $200,000. That would equate to what, 250,000 mortgages that the government is now on the hook for? 50 billion divided by 200,000?

Let’s assume there is a major financial collapse and 10% of those mortgages are defaulted upon. This would be quite the event, considering that even now less than 1% of mortgages are defaulted. So of those 250,000 mortgages that the government is responsible for, 25,000 of them default.

25,000 mortgages, at an average balance of $200,000 = $5 billion that the government would “lose.” (though of course this assumes that all 25,000 of those houses simply rot into the ground, with no one ever again buying the house and/or property).

That would leave the government still responsible for $45 billion worth of mortgages.

$45 billion at an annual interest rate of say, 5%, equals $2.25 billion a year. In three years not only will the government have recuperated its money from the great 10% mortgage default crisis of 2008, but it will actually be making a profit. If the default rate is actually closer to 1%, as all stats say it is, they’ll actually make a profit on it THIS YEAR. So much for that deficit, eh?

As for why the banks would do it, why not? If I am reading this right (and I’m no expert), they too can’t lose. They dump some mortgages, but given where mortgage interest rates have been the last few years they are all low interest rates anyways. They then get immediate cash, $50 billion worth, with which they turn around and lend to us schmucks, the average borrower, with our credit cards, lines of credit and so on. Probably at a much higher interest rate than what they would have gotten on all those low interest mortgages. They will actually get MORE in interest payments than they would have originally.

Is this a brilliant Machiavellian/Conservative plan, or am I missing something?

[Disgruntled70sHab]

BC, I read this earlier this morning and I really didn't know what to make of it. Your assessment seems logical, but the scenario is too much like the financial bailout that happened south of us.

I'd like to see it unfold as you say, though.

Cheers.

[CrocRob]

Nov 12, 2008 11:55:18 GMT -5 BadCompany said:

Okay financial wizards, tell me if this accurate;

The Canadian government just announced they are buying up $50 billion worth of mortgages. Let’s assume the average mortgage balance is $200,000. That would equate to what, 250,000 mortgages that the government is now on the hook for? 50 billion divided by 200,000?

Let’s assume there is a major financial collapse and 10% of those mortgages are defaulted upon. This would be quite the event, considering that even now less than 1% of mortgages are defaulted. So of those 250,000 mortgages that the government is responsible for, 25,000 of them default.

25,000 mortgages, at an average balance of $200,000 = $5 billion that the government would “lose.” (though of course this assumes that all 25,000 of those houses simply rot into the ground, with no one ever again buying the house and/or property).

That would leave the government still responsible for $45 billion worth of mortgages.

$45 billion at an annual interest rate of say, 5%, equals $2.25 billion a year. In three years not only will the government have recuperated its money from the great 10% mortgage default crisis of 2008, but it will actually be making a profit. If the default rate is actually closer to 1%, as all stats say it is, they’ll actually make a profit on it THIS YEAR. So much for that deficit, eh?

As for why the banks would do it, why not? If I am reading this right (and I’m no expert), they too can’t lose. They dump some mortgages, but given where mortgage interest rates have been the last few years they are all low interest rates anyways. They then get immediate cash, $50 billion worth, with which they turn around and lend to us schmucks, the average borrower, with our credit cards, lines of credit and so on. Probably at a much higher interest rate than what they would have gotten on all those low interest mortgages. They will actually get MORE in interest payments than they would have originally.

Is this a brilliant Machiavellian/Conservative plan, or am I missing something?

This is assuming that the mortgages were purchased at face value too, which undoubtedly they likely weren't.
And the Banks likely won't lend the money, because the whole reason they're selling the mortgages is so they have deposit capital to cover their current risky assets in the first place.

[BadCompany]

Nov 12, 2008 12:28:33 GMT -5 CrocRob said:

This is assuming that the mortgages were purchased at face value too, which undoubtedly they likely weren't.
And the Banks likely won't lend the money, because the whole reason they're selling the mortgages is so they have deposit capital to cover their current risky assets in the first place.

Even if the banks don't lend out the money it still works for the government, does it not? They're still collecting the 5% interest (or whatever it is) on the mortgages they took over, right?

The only way the government (and by extension the taxpayer) would lose money is if mortgage default rates went through the roof, like into the 50% range, in which case the $50 billion invested here will probably be the least of our worries (I'm thinking we will be more concerned with the bread riots).

I believe the current mortgage default rate is something like 0.70%, or something like that. As I hypothesized, even if that were to jump up to 10%, the government would still be sitting pretty in the rather short term...

[CrocRob]

Nov 12, 2008 12:36:19 GMT -5 BadCompany said:

Nov 12, 2008 12:28:33 GMT -5 CrocRob said:

This is assuming that the mortgages were purchased at face value too, which undoubtedly they likely weren't.
And the Banks likely won't lend the money, because the whole reason they're selling the mortgages is so they have deposit capital to cover their current risky assets in the first place.

Even if the banks don't lend out the money it still works for the government, does it not? They're still collecting the 5% interest (or whatever it is) on the mortgages they took over, right?

The only way the government (and by extension the taxpayer) would lose money is if mortgage default rates went through the roof, like into the 50% range, in which case the $50 billion invested here will probably be the least of our worries (I'm thinking we will be more concerned with the bread riots).

I believe the current mortgage default rate is something like 0.70%, or something like that. As I hypothesized, even if that were to jump up to 10%, the government would still be sitting pretty in the rather short term...

Yeah. I'm not sure whether you're complaining, or applauding the govt from doing this. It's just about free money for them, because even if some of the mortgages default the govt is asset-backed enough that they don't even necessarily have to forclose, but can negotiate terms to recoup most of the mortgage value anyway.

Banks can't, generally speaking, do that because they need the deposit capital. So they forclose and sell the house to recoup as much as they can immediately.

I think this is also a move by some Canadian banks to get capital so they can move into the US market by buying up some of the failing banks there.

[Skilly]

Nov 12, 2008 11:55:18 GMT -5 BadCompany said:

Let’s assume the average mortgage balance is $200,000.

This reminds me of the Lotto 6-49 commercial (There ya go CH, that's one I like). $200,000 can get you 2 houses here!

[franko]

He's not kidding! While we were in Newfoundland last summer we found an amazing house . . . 4 bedrooms, 2 baths, an acre of land, on the water . . . no property tax . . . for $98,000!

Of course, there are no services either. No water or sewer, and no access through the winter "if" it snows . . . no snow removal to the town.

But if you want a cheap house . . . [the 3-bedroom beside it was selling for $45,000, but it was kind of a wreck. But $45,000!

[Skilly]

Nov 12, 2008 16:50:44 GMT -5 franko said:

He's not kidding! While we were in Newfoundland last summer we found an amazing house . . . 4 bedrooms, 2 baths, an acre of land, on the water . . . no property tax . . . for $98,000!

Of course, there are no services either. No water or sewer, and no access through the winter "if" it snows . . . no snow removal to the town.

But if you want a cheap house . . . [the 3-bedroom beside it was selling for $45,000, but it was kind of a wreck. But $45,000!

Hey, I don't have water and sewer services .... it aint all that bad. Just clean the septic, and nothing beats well water!

That winter thingy though , you must have been looking at the "cabins" round the bay .... but just think, with the $900,000 you just saved (if you were gonna buy something similar in Ontario and points west) you can now afford to have someone come plow that road for you when it snows...

[Disgruntled70sHab]

Here's another opinion given by John Ivison of The National Post.

==========================================================================================================

Taxpayers already on the hook
Comment; Ottawa's $50B buy doesn't increase the risk

John Ivison, National Post
Published: Thursday, November 13, 2008

The reaction to the news that Ottawa is purchasing another $50-billion in residential mortgages from Canada's banks was understandable. "We're now joining the rest of the lemmings on the edge of the cliff," wrote one reader on the National Post Web site.

The impression that "once again the taxpayer is getting screwed" was strengthened by comments made by U. S. Treasury Secretary Henry Paulson yesterday morning. He said the United States won't buy any of the dodgy mortgages that caused the subprime mess and indicated his government will instead spend its US$700-billion financial rescue package on really sound investments like auto loans and credit card debt.

Canadian observers must have been wondering whether it was such a good idea for their government to be buying up more mortgages when their U. S. counterparts were indicating that even bankrupt automakers were a safer bet.

In fact, the federal government's move was not as hair-brained as it first appears and was a calculated attempt to de-couple the Canadian financial system from events outside our borders.

The initial evidence suggests it failed -- the TSX tumbled by more than 400 points after Mr. Flaherty's announcement.

That the plunging markets were a reaction to Mr. Paulson announcement -- investors had hoped the U. S. government would wipe the bad mortgage debt off the banks' books -- does nothing to obscure the Canadian government's impotence. It had just pumped another $50-billion of liquidity into the nation's banking system, on top of the $25-billion it committed last month, and the main stock market dived 5%.

But is the criticism that the taxpayer is being scammed by the banks valid? Mr. Flaherty is betting on the current crisis being a tale of two housing markets. The government, through the Canada Mortgage and Housing Corporation, has already insured the majority of the mortgages that will now be owned by Ottawa. The taxpayer is already on the hook, in the event of default, and there is no incremental risk because of yesterday's announcement.

CMHC is banking on a low default rate because to qualify for insurance, homeowners have to put down 5% of the purchase price; ensure that their housing costs account for not more than a third of their budget; and have debt loads less than 40% of their income.

The way the process works is complicated, but the round of auctions completed by CMHC yesterday illustrates how the government hopes it will play out.

In this round, CMHC said it would hand over $7-billion in cash to Canadian financial institutions, which agreed in return to pay a minimum interest rate of 2.78% (this is the rate at which the government was able to raise the cash through the sale of Treasury bonds and bills). The government eventually received an average rate of 3.78% in return for taking on the mortgage-backed securities -- a 1% profit for the government. Estimates suggest that if demand from the banks remains strong for the remaining auction rounds, Ottawa could net $750-million in profit.

This seems to be too good to be true-- rather like the e-mail received from a Nigerian widow who claimed she had just weeks to live and wanted to donate her $20-million fortune to me. Is the liquidity crunch so tight that banks are falling over themselves to get rid of what the government calls "high-quality assets"? In a piece in yesterday's National Post, TD Securities economist Eric Lascelles noted that there are no signs that credit has been withdrawn in Canada or the United States -- in fact, mortgage lending has grown 7.7% this year, and personal loans are up 15.3% in this country.

Who knows what's in these pools of mortgages precisely? Mr. Flaherty was precise in his wording yesterday -- there is "no additional risk to the taxpayer." Presumably that means there's no more downside than the unquantifiable but potentially massive liability for which CMHC has already signed up. As unemployment rises, there must be many, many homeowners who qualified for CMHC insurance who would quickly be at risk of foreclosure if they lost their job.

We can only hope that Mr. Flaherty's confidence that this is a victory for Canadian households, businesses and the economy is not misplaced. "It is an efficient, cost-effective and safe way to support lending in Canada at a time of extraordinary strain in global credit markets," he said yesterday.

All you can say is, one more such victory and we'll be really sunk.

[e-mail]

Page 1 of the National Post

Page 2 of the National Post

[The New Guy]

Nov 12, 2008 19:18:51 GMT -5 Skilly said:

Nov 12, 2008 16:50:44 GMT -5 franko said:

He's not kidding! While we were in Newfoundland last summer we found an amazing house . . . 4 bedrooms, 2 baths, an acre of land, on the water . . . no property tax . . . for $98,000!

Of course, there are no services either. No water or sewer, and no access through the winter "if" it snows . . . no snow removal to the town.

But if you want a cheap house . . . [the 3-bedroom beside it was selling for $45,000, but it was kind of a wreck. But $45,000!

Hey, I don't have water and sewer services .... it aint all that bad. Just clean the septic, and nothing beats well water!

That winter thingy though , you must have been looking at the "cabins" round the bay .... but just think, with the $900,000 you just saved (if you were gonna buy something similar in Ontario and points west) you can now afford to have someone come plow that road for you when it snows...

My sister-in-law bought a brand new house in CBS (an ever growing collection of communities about a half hour from St. John's, for those not familiar with the area) in the spring of 2007. 3 bedroom, 2 bathroom, unfinished basement, kitchen with granite counters, town water & sewer etc. etc. The paid somewhere in the vicinity of $150,000 for it.

I tell that to my friends who have recently bought houses in the GTA just to watch them weep. Of course, I don't tell them (if you feel like really going out into the wilderness of Newfoundland) you can buy a small house for just under $20,000 (http://www.remax.nf.ca/listings.asp?id=25279 - it's a house in Grand Bank, about a half-hour from where I grew up, all the fixins and a beautiful ocean view (please note: this probably means that in the winter the wind will always be coming in off the water and it will always be cold))

[franko]

One of the things we did while in Newfoundland this summer was to "scope out" the houses in the province -- while it is as yet a long way off we are thinking that retirement to a small place by rough water [her ideal: a stone cottage, no matter if we are snowed in for a bit as long as we have firewood and internet access] . . . but the summer on the island was too blustery for her, so I guess we're looking mainland somewhere!

We have relatives in BC [that's reason, afaiac, to not go there], but it's too gray there for too long . . . I think we're going to wind up staying here, downsizing, and trying to spend a month somewhere south, somewhere cheap.

Couldn't believe the friendliness of the people . . . and the helpfulness ["My brother-in-law is selling his place . . . "].

[roke]

Not to take away from the talk about homes in Newfoundland, but I read a very interesting (and long) article last night about the whole sub-prime fiasco and what the investment banks got themselves into. It's written by Michael Lewis, who is probably better known for writing Moneyball.

The end of Wall Street's Boom

[Habs_fan_in_LA]

Nov 13, 2008 13:27:42 GMT -5 franko said:

One of the things we did while in Newfoundland this summer was to "scope out" the houses in the province -- while it is as yet a long way off we are thinking that retirement to a small place by rough water [her ideal: a stone cottage, no matter if we are snowed in for a bit as long as we have firewood and internet access] . . . but the summer on the island was too blustery for her, so I guess we're looking mainland somewhere!

We have relatives in BC [that's reason, afaiac, to not go there], but it's too gray there for too long . . . I think we're going to wind up staying here, downsizing, and trying to spend a month somewhere south, somewhere cheap.

Couldn't believe the friendliness of the people . . . and the helpfulness ["My brother-in-law is selling his place . . . "].

It's not you, It's me.
Climate is more important to me than a great view of iceburgs passing by a rugged picturesque coastline of mountains, trees and rocks.
The GOOD!
Riding a motorcycle 12 months a year, 355 days of sunshine, snow on the ski trails in the mountains 60 miles away, golf for those who like it, never heating the house and air-conditioners turned on 20 days a year, bbq all year round, pool and hot tub. Beautiful mountain roads. Schools and colleges that are bigger and more crowded but have better and more varied programs. Rum at the grocery store at $9.95 for 1.75 litres and gasoline at $2.19 a gallon.
The BAD!
Expensive healthcare, expensive real estate.
The UGLY!
Trimming plants 12 months a year, smog (it's getting better but it's not there yet), traffic caused by millions who all want to live in paradise, drive to the places I want to go on the highways I want to use. Most of all I miss watching the Hab's in person more than every three years.

[Cranky]

Nov 18, 2008 17:52:54 GMT -5 @roke said:

The end of Wall Street's Boom

Thank you for the headache! LOL!

I read the article twice and some passages far more then that, but I still don't understand it all. Either I'm stupid or this thing is...

Interesting tidbits....

Back in 2002 or 2003, I got a letter from a large bank that they had given my company a very large line of credit. For a minute or two, I thought it was some prank or one of those Nigerian gold mines letters. Nope, it was a major bank (with an offshore name) and it was legitimate. Considering that I never borrow, I found it wierd that they just slap my company name on a piece of paper and all I have to do is go down there with a wheelbarrow. Now imagine a company that needs money and these banks are offering truckloads of it?

How tempting would it be for that businessman to buy more equipment, or expand the operations, or just take on business that is profitless just to take market share? After all, it's easy money.....all you have to do is ask for it.

[Habs_fan_in_LA]

I guess Fletcher asking congress for $25 billion to bridge finance the Maple Leafs hiring Burke and buying him a private jet is out of the question.

[Cranky]

Nov 12, 2008 11:55:18 GMT -5 BadCompany said:

Is this a brilliant Machiavellian/Conservative plan, or am I missing something?

Yup, you did. You forgot to ask some basic questions.....Which mortgages did they buy? Are they just normal mortgages or highrisk ones? Do you know who is and what CHMC does?

Find out what CMHC does then you will find out how "smart" this move was. Here is a hint.......people who put down less then 5%......did you say 10% default rate? Try 50% to 70% in a deep recession.

You know what they say about...if it's too good to be true...but then again, the moronic media have failed to look past the soap bubbles. We now are on the hook for the entire house of cards.

[Cranky]

One of the posts has some link that is very wide. If you see my name on the bottom of your post, I was trying to find the problem so as to make the posts readable.

And I didn't linki nudies in your post..HONEST! LOL!