More on the CRA

Though the source won't convince any of the Republican Faithful, the facts are in line.

CRA only applies to banks and thrifts, when most of the troublesome loans didn't originate with those types of institutions. Only one in four did. (And, again, typically, those loans weren't the problems; they had a good chance of being paid back.)

I've also done a bit more research, and I understand the bit about credit default swaps, now.

A credit default swap is just a form of insurance. You give me X amount each year, and I promise, in return, to make sure you don't lose the face value of the investment. So, you invest in a 7% bond, but pay me 1.5% to make sure you don't lose the face value. You get 5.5% return on your investment, and you're happy. I get 1.5% of your investment, and if your bond seller doesn't default, I'm *really* happy.

But it only works if I have the assets to back your potential loss. You don't know if I do, because my assets might include multiple CDSes. And no one can value them, because no one can tell what the risk of default on the bonds are, because so many of the bonds are made up of stuff like "mortgages where we don't know the risk of default because we didn't bother verifying enough financial information, and plus, who knows if the people can handle one or more "resets" on their ARM?"

It's stuff like this that makes me understand the reasoning behind the bailout. See, no one is saying "give money away." The idea is "buy up CDSes and mortgage bonds and stuff like that; people now have more money than they had before, freeing up money for loans and letting some of them recover. Later, maybe we can find out if any of these are worth something or not."

Because one of the biggest problems that seems to be going around is *no one is buying anything*. No one will buy the mortgage bonds. No one will buy the CDSes. No one knows how to value them, so they won't offer a cash price for them.

And then, this is the part that gets interesting. When financial institutions value assets, they have to set the value to the "fair market value", what they can sell the asset for. But no one is buying anything. There isn't a reasonable fair market value!

There's a proposal to remove that requirement, which is absolutely frickin' *insane*. I mean, what, value an asset at something *other* than what someone will pay for it? How do you do that? Why not just assume your pile of super-expensive mortgages whose monthly payments are due to skyrocket are all as good as T-bonds? It's a great way to cheat people, by pretending you have more capital than you do! On the other hand, that collection of mortgage bonds you're holding might end up paying off at face value, plus interest... it's just no one is willing to buy them because you can't prove they'll pay off like that. Good assets are being valued the same as bad ones.

When I step back and look at all of this from a distance, I have to admit, as a kind of black humor, this could be almost funny, if real people weren't facing real problems as a result.

More on the CRA

Though the source won't convince any of the Republican Faithful, the facts are in line.

CRA only applies to banks and thrifts, when most of the troublesome loans didn't originate with those types of institutions. Only one in four did. (And, again, typically, those loans weren't the problems; they had a good chance of being paid back.)

I've also done a bit more research, and I understand the bit about credit default swaps, now.

A credit default swap is just a form of insurance. You give me X amount each year, and I promise, in return, to make sure you don't lose the face value of the investment. So, you invest in a 7% bond, but pay me 1.5% to make sure you don't lose the face value. You get 5.5% return on your investment, and you're happy. I get 1.5% of your investment, and if your bond seller doesn't default, I'm *really* happy.

But it only works if I have the assets to back your potential loss. You don't know if I do, because my assets might include multiple CDSes. And no one can value them, because no one can tell what the risk of default on the bonds are, because so many of the bonds are made up of stuff like "mortgages where we don't know the risk of default because we didn't bother verifying enough financial information, and plus, who knows if the people can handle one or more "resets" on their ARM?"

It's stuff like this that makes me understand the reasoning behind the bailout. See, no one is saying "give money away." The idea is "buy up CDSes and mortgage bonds and stuff like that; people now have more money than they had before, freeing up money for loans and letting some of them recover. Later, maybe we can find out if any of these are worth something or not."

Because one of the biggest problems that seems to be going around is *no one is buying anything*. No one will buy the mortgage bonds. No one will buy the CDSes. No one knows how to value them, so they won't offer a cash price for them.

And then, this is the part that gets interesting. When financial institutions value assets, they have to set the value to the "fair market value", what they can sell the asset for. But no one is buying anything. There isn't a reasonable fair market value!

There's a proposal to remove that requirement, which is absolutely frickin' *insane*. I mean, what, value an asset at something *other* than what someone will pay for it? How do you do that? Why not just assume your pile of super-expensive mortgages whose monthly payments are due to skyrocket are all as good as T-bonds? It's a great way to cheat people, by pretending you have more capital than you do! On the other hand, that collection of mortgage bonds you're holding might end up paying off at face value, plus interest... it's just no one is willing to buy them because you can't prove they'll pay off like that. Good assets are being valued the same as bad ones.

When I step back and look at all of this from a distance, I have to admit, as a kind of black humor, this could be almost funny, if real people weren't facing real problems as a result.