Comments on: Just when you thought it couldn't get crazier

By: Emma Jones

Emma Jones — Wed, 20 May 2009 15:08:00 +0000

Another great migraine article! I always like read your blog so I always come back for more.

By: Dennis Howlett

Dennis Howlett — Thu, 02 Oct 2008 06:48:24 +0000

@ed: I'm not sure it's quite as clear cut as you say but even if the market was 'free'er' than it is now, there is no guarantee that those asset values would rise significantly. However, what you imply about the short term market effects is interesting. As always, we'll have to wait and see.

By: Ed Kless

Ed Kless — Thu, 02 Oct 2008 06:30:40 +0000

Neil – I agree with your comment that as long as government is willing to go along with a bail out that there is no free market solution because there is not incentive. This is the morale hazard that very few people are talking about.

Dennis – There is no market because there is no access. If there were access the market would solve the problem. I personally would pay .50 on the dollar for as much of these securities as I could afford. (I would even mortgage my house.) My point is that we do not have ACCESS. The a-holes in Washington have blocked access and now say they are the only solution. Of course, the way they play the game there can be no other (free market) solution.

By: Dennis Howlett

Dennis Howlett — Wed, 01 Oct 2008 14:17:57 +0000

I don't think I'm missing this at all. If there is no market then there is no value. It really doesn't matter about the underlying asset. In this case it isn't just sub-prime but the sliced and diced derivative trades where no-one's really sure what they own.

By: Neil McIntyre

Neil McIntyre — Wed, 01 Oct 2008 14:10:54 +0000

Dennis, I've been waiting for someone to say this! Nearly wrote it myself!

Ed, I don't think it's out of the realm of possibility that 80% of subprime mortgages will default in certain securities. I agree there's a free market solution, but as long as the bailout is a possibility, the institutions aren't going to seek one.

By: Ed Kless

Ed Kless — Wed, 01 Oct 2008 13:54:13 +0000

I think your missing part of the point on this. In my (albeit) limited understanding of this, these companies are forced to value these securities at a value clearly below what the would really be worth.

For example, one company (I think it was Merrill) had to price these at 22 cents on the dollar. For ease of math, let's call it 20 cents. This would mean that for the mortgages (there would be thousands of them) in this security 4 of 5 would have to foreclose AND the asset would be reclaimed at zero. I find this hard to believe.

In fact, if I could I would be buying these securities at 40 cents right now! The problem is that there is a perception that on the gov't can come up with the cash to do this. My opinion is that there is a free market solution to this crisis. Let's the companies actually sell these off at an auction. My bet they would go for close to 75 cents on the dollar in the open market.