Saturday, October 11, 2008

Bailout Math

Political season must be silly season. The sheer magnitude of the bailout boggles my mind. That Wall Street got Congress to buy into the program is testament to the quality of our elected officials. I suspect that it will only be months before the finger pointing starts singling out the most outrageous abuses of taxpayer dollars. Saying that the bailout will come from tax collections is probably an overstatement as it will likely come from the sale of bonds which whose only chance of ever getting paid back is in inflated dollars.

The 700 billion figures out to $140,000 per home for 5 million homes. There are 125 MM homes in the US and many of them probably are not $140,000 underwater. My suggestion would be that the US government offer second mortgages that have zero current interest or payments so that banks could refi non performing mortgages at lower rates. If the house were sold at some future point, the second mortgage would be repaid back to the government. The big advantage of this is that it keeps people in their homes and it eliminates a huge portion of the non performing loans which restores the value of the securities that have declined in value wiping out the reserve capital of the financial institutions that are in trouble. I'm sure it can't be as simple as this. The better approach is to use about $600 billion for legal and transaction fees....