Teetering on the brink of the new Depression

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nigelswift N
nigelswift Sep 20, 2008 09:15:42
Replying to handofdave

I think there's a huge problem that the plan to buy up bad debts hasn't and can't yet evaluate.

Injudicious lending has two elements - giving money to people who are at high risk of not paying it back (and the degree to which that has happened can now be evaluated) and giving money against dodgy and over-valued security - and the degree to which that has happened can't be known until you come to attempt to sell the security.

At present, you might think a $200,000 loan against a security originally valued at $200,000 that has subsequently probably reduced in line with housing statistics to a probable $150,000 is $50,000 short. But this pre-supposes the original valuation was correct. In truth, dodgy lending includes major pressure on professional valuers and accountants to be over-optimistic on the value. This ranges from "optimism" to outright fraud. (It works like this - all lending institutions have "panels" of valuers. If a valuer provides a less-than-adequately high valuation guess how many more valuation instructions he gets sent? This applies right across the board and is universally known in the industry yet can never be proved by an outside agency. Panel valuers are dropped merely because of "spelling mistakes" or whatever.

As someone that was employed picking through and identifying thousands of dodgy or fraudulent valuations after the last bubble burst I fear that this will be an enormous factor. And right now, the bail out is being calculated purely on the basis of the supplied valuations, with no-one having the faintest idea of how overstated they might be. The American taxpayer is buying a pig in a poke and might have to shell out another huge sum in a year or two.

S stray
stray Sep 20, 2008 10:04:11
Replying to nigelswift

After the last bubble though properties did eventually reach their overvalued state, in fact they broke it considerably. I'm wondering as you're someone who has seen this from inside if you think that will happen again ? Also, I think it's important to note that this bail out isn't just covering the mortgage, insane credit, debts but also the garbage debts in other markets. It's not touching the problems in derivatives though.

I dunno, it all depends how these debts get traded. Granted, nothing they're suggesting isnt gowing to blow up later, it is, but it's very unpredictable as to how it'll play out. After all, the last time something similar was done the govt did actually turn a profit out of the debts it bought. Basically, although you'll never see a commentator over there say it, the US govt is nationalising the market. They'll have more control over it than they've ever had.

It will be interesting to see the full details of the plan, especially how the debt auction will work (and when), and also how the agency they set up to manage it functions within (or creates a new) legal framework. Whatever, I forsee China and other sovereign funds (singapores perhaps) owning a lot of US banks eventually.

Edit : Also, I think you're wrong about the bail out being based on current valuations, although obviously it has to cover the debts (which were obviously based on them) there is talk of buying debt at discount. Also as the plan is also covering debts in other markets, other than property, there will be offsets in that regard. Or have I got it wrong ?