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Monday, September 29, 2008


Home Refinance

It really is a shame how all of this has turned out. They did lend the money to the banks that really needed it and now the banks are not lending the money. Unfortunately the government did not put the proper safeguards in place to prevent misuse of the funds. What a nightmare. What happenes now?

Jeff Sovern

Thanks for this. but I'm still confused. I understand there's a problem of credibility among financial institutions, caused in part by credit default swaps, but I keep hearing that even credit-worthy borrowers can't get loans and that that is a principal reason for the bailout attempt. Is that an exaggeration? Is it an argument over who is credit-worthy?

Jennifer Johnson

Because the credit freeze isn't to credit worthy borrowers. If you are a credit worthy borrower, you can still get a loan. The issue is a credibility problem among the major financial institutions that transfer money back and forth to each other on a daily basis. Once one of them suffers a credibility problem, no one wants to lend to them anymore, they can't get business (prime brokerage, overnight repos, sec lending, etc.) which drives their stock price down and more importantly their cds spread soar through the roof which wipes out equity in the financial insitution. It is also a subprime problem in that there are a substantial number of mortgages which are classified as subprime and because of mark to market acctg rules must be marked at prices below fair value. For example, even if 80% of the mortgages in the pool are still being paid, because no one wants subprime, the best bid you might receive is 20 cents on the dollar. If held to maturity and never sold the chances of you receiving more than 20 cents on the dollar in the future are pretty good. However, that doesn't matter under mark to market acctg. It has the potential to deteriorate much farther past the financial sector, and it will if nothing is done soon to stop it. So far equities are pricing in a depression scenario or at least a sig recession, but if mark to market acct rules are suspended - at least temp until all this can be sorted out - and sufficient liquidity is injected into financial instituitons balance sheets the carnage can stop and healing can start. I heard an interesting comment the other day and I don't know who said it so unfortunately I cannot give proper attribution but basically he said that if you child gets in trouble and you send them to their room as a punishment, you wouldn't leave them in there if your house caught on fire to finish out their punishment. You will rescue them.

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