Monday, December 10, 2007
What I know I got wrong: I kept saying you had to have 3% equity. In fact, you have to have LESS than 3%. As CR points out:
This is plan is for homeowners with weak credit (maybe 1.2 to 1.8 million) that are underwater - or about to be underwater - on their homes. They can't sell. They can't refinance. And they probably can't make the new payment.I completely screwed that up on the air. Ugh.
What I did not realize but doesn't change my mind: The degree to which there may be risk-shifting to the public sector. Also at Calculated Risk, Tanta explains "at the simplest level, what's going on here is that loans that were "insured" (or credit-enhanced) by the private sector are being refinanced into loans that are insured or credit-enhanced by the public sector." So no current dollars are put out there, but the possibility is that government money would be at risk if the defaults keep happening. Is that a bailout? I don't think so.
What runs through my head watching this unfold is the failure and organized private sector rescue of Long Term Capital Management in 1998. In particular I call your attention to the testimony of then-New York Fed President William McDonough. The similarities are striking: See if you see them too.
Two factors influenced our involvement. First, in the rush of Long-Term Capital's counterparties to close-out their positions, other market participants -- investors who had no dealings with Long-Term Capital -- would have been affected as well. Second, as losses spread to other market participants and Long-Term Capital's counterparties, this would lead to tremendous uncertainty about how far prices would move. Under these circumstances, there was a likelihood that a number of credit and interest rate markets would experience extreme price moves and possibly cease to function for a period of one or more days and maybe longer. This would have caused a vicious cycle...