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Re: WORTH BREADING How big a bailout?
From: David Farber <dave () farber net>
Date: Sat, 20 Sep 2008 19:24:03 -0400

Begin forwarded message:

From: Adam L Beberg <beberg () stanford edu>
Date: September 20, 2008 3:01:23 PM EDT
To: dave () farber net
Subject: Re: [IP] Re:   WORTH BREADING How big a bailout?

"Gerry Faulhaber" wrote on 9/20/2008 9:52 AM:
What must be done? Well, many if not most of these mortgages behind these securities are probably just fine, and will be repaid. Some will probably end up paying part of what they owe, and some will just be complete write-offs.

Sorry, this is what you're hearing but is wrong, and people really need to understand why. It's central to what is going on, and how the taxpayer is getting fleeced this time.

The bankers got much smarter since the last time. They created the new CDOs and other exotics that work a lot differently then you'd expect. This was brilliant and you have to respect the bankers, and they deserve all the loot they get as they scam the taxpayers. Arrr matey!

Ex: They take lets say 1000 mortgages and slice them up into CDOs, but not as 10 groups of 100, that is the old way, and made sense. They are sliced up by losses - so the first one is the first 10% loss, then the next 10%, etc. So 2-3 of the 10 are now worth ZERO because houses are worth much less then a couple years ago and foreclosure auctions only recover a fraction of the value. One of them is worth all of it's value unless housing collapses to 10% which is not likely. Thanks to the exotics, the banker can only win because all of the risk is sold off as AAA debt to pensions and local governments and all the gains are kept. What you're thinking is correct - this makes no sense and nobody would be dumb enough to buy these things if they understood them.

The stuff the taxpayer is getting ready to buy are those first CDOs, the ones worth zero that the banks cannot sell because they are worthless. Don't worry they are still rated AAA, so you're getting a great deal!

So this time it is different then the RTC, which bought actual real mortgages. And this is not even widely understood in the banking world. Warren Buffet says he doesn't understand these exotics, and how could he, they make no sense unless you can think like a pirate, and he's a good guy.

They got us. Lock, stock, and barrel. Nothing we can do about it. Joke is on them tho - their loot is in US dollars.

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