Our society is a capitalist one, admittedly a fragile yet firmly planted one, based upon the natural swings of our markets - financial and otherwise, all carefully manipulated by the shrouded-in-secrecy, all powerful Fed (anyone out there read The Creature from Jekyl Island??).
But all confidence in the Fed aside: President Bush is working with the big boys on a plan to aid defaulting borrowers. According to the Wall Street Journal, the main idea of this aid would be to get lenders to extend for a number of years the short term low rates that were offered on subprime mortgages, loans. They even want to name it something catchy like, "Teaser Freezer." Sounds good, right? What's wrong with helping out the little guy?
Well, right or wrong, every loan in these billion dollar defaulting portfolios was funded by investors, offered by brokers and lenders and chosen (yes I said chosen) by consumers. Every single funded loan put money in the pocket of a multitude of people: from the consumer to realtors, escrow officers, title reps, loan officers, brokers, lenders, account executives, warehouse lenders and investors.
If the consumer and the lending bank were the only ones being affected, I don't think we would be seeing the extent of government involvement we are seeing here. But the bottom line is that there is so much more at stake than the consumer losing his home or the value of a bank's lending portfolio. In fact the bank that lent the money, most likely already made a bundle on the loan and used that money to lend more. Most of the loans originated are sold to an investor and then packaged together in billion dollar hunks and ultimately sold on Wall Street. The Wall Street billion dollar buyers insure these investments. Some of the same banks who underwrote, funded and sold the loans in the first place are the ones who insure the billion dollar investments. Here is where the plot thickens. In fact, it gets so muddy that it is impossible to boil down to a recognizable state. Unchecked, we are in for it. I believe the word recession is a gross understatement.
BUT, as Newton's Third Law states, "Every action has an equal and opposite reaction." I believe that applies here. Where am I going with this? Well, when asked about the proposal on Friday, the President's press secretary offered some comforting news: Dana Perino said, "The president has been clear that no taxpayer money should be used for any sort of bailout."
So at last, here is my problem with the government's Teaser Freezer: Someone is going to pay. Every new law opens the way for a flood of litigation. And believe me, while Bush is trying to include the big players, it will be impossible to get everyone on board with his plan. Investors are going to lose big money and they will spend big money on high-powered attorneys to challenge the legality of the "Teaser Freezer" and get their money back.
And you can bank on this: taxpayers will foot the multi-million dollar bill to defend the law. Ironic isn't it?
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Lisa,,,I have not seen a detailed breakdown of the aftershock that this will cause like you put in this post..I to feel that while it will help some, many more will suffer by SERIOUS changes that will occur from the prospective buyers on the sidelines...This Will entail a lot of throwing the baby out with the bath water kind of thinking..I checked my mail, and I did not receive a ballot to express my opinion. However, the popular pundits seem to think it will allow for a more stable controlled drop instead of an increasing speed up of the inevitable crash that is coming..Best wishes Lisa......hold on