6 ms·

The U.S. Treasury stepped in to prop up the banks (i.e. the financial system) with the Troubled Asset Relief Program or TARP. This was essentially taxpayers loa

by jeromec 16y ago

The U.S. Treasury stepped in to prop up the banks (i.e. the financial system) with the Troubled Asset Relief Program or TARP. This was essentially taxpayers loaning money to banks in trouble which were threatening to bring down the entire financial system, since no one else would, in exchange for ownership in the banks. The Federal Reserve is not the same thing as the Treasury.

jswinghammer 16y ago
You're correct but the Federal Reserve took actions on its own to try to make the banks solvent and directed the treasury on its course of action. The Federal Reserve ended up with a bunch of garbage on its balance sheet as a result of this activity. We don't know to what extent because there is no full audit of the Federal Reserve's activities in this department (for our benefit of course). We do own the "Red Roof Inn" though so that's cool I guess. http://www.youtube.com/watch?v=pE3oiKuU8UI http://www.youtube.com/watch?v=pE3oiKuU8UI
- jeromec 16y ago
  Yes, you're correct. The Fed I believe was forced to purchase many of the toxic securities directly. Many people don't understand just how severe and dire the situation was. One thing I'm not quite clear about is what happens at the individual home level with some of those securities. For each of the mortgages sent up to Wall St., who is the legal owner of it? I read somewhere that many of these mortgages were sitting in boxes in warehouses somewhere. If you've signed to repay a loan to a lender, how can those terms be enforced when rights to the loan are divvied up as securities?
  - rbranson 16y ago
    The relation is like a futures contract to a commodity. You are just trading an abstract thing, not the commodity itself. CDOs are bonds created by the corporations that hold the assets, not assets themselves.
    - jeromec 16y ago
      Right, okay... so let's say I walked into my local bank and took out a mortgage, which was then sent to Bear Stearns, which then collapsed. JP Morgan Chase bought those assets, so I guess my mortgage would now be held by JP Morgan Chase...
      - btilly 16y ago
        No, actually here is what probably happened. Bear Stearns created a small shell company with a detailed and interesting charter. They loaned this company a large sum of money, in return for a set of bonds. The company used that money to purchase the loans from Bear Stearns. At this point Bear Stearns owns bonds whose value is approximately that of the loans. (Actually slightly more because the bonds are structured to better meet investor's needs.) They then turned around and sold the bonds to investors. One of those investors (in theory it doesn't have to happen this way, but in practice it does) gets both the most risky piece of the investment, and a contract to run the company by rules specified in the company charter. That investor is called the servicer, and they are responsible for the day to day activities of the company. Which mostly consist of collecting loan payments, paying out the bonds, and making detailed records available to any properly qualified investor. Once the last loan is gone, the company has no assets and goes away. Your loan is now owned by the shell company (which has no employees and exists only to shovel income from loans and send them out again as bonds), which is run by the servicer. JP Morgan Chase did not purchase any connection to this company when they bought Bear Stearns unless Bear Stearns chose to keep some of the bonds. (They did keep some from many deals, and purchased some from deals they didn't do, so they may be an investor.) Control is with the servicer. However it should be noted that the servicer's hands are tied by the charter, and there is very little flexibility in how they can choose to run things. Also note that once the deal goes bad, the servicer's incentive is to run the deal in whatever way maximizes the servicing fees they get. This has proven to result in decisions that are counter to the interests of both investors and people who owe the loans. For instance renegotiating a lower loan that people can actually pay generates less in servicing fees than taking a loan through bankruptcy court. Therefore the servicer often prefers driving loans into bankruptcy even though that is worse for everyone else. Now do you see why this is a mess?

by jeromec 16y ago

jswinghammer 16y ago

You're correct but the Federal Reserve took actions on its own to try to make the banks solvent and directed the treasury on its course of action. The Federal Reserve ended up with a bunch of garbage on its balance sheet as a result of this activity. We don't know to what extent because there is no full audit of the Federal Reserve's activities in this department (for our benefit of course). We do own the "Red Roof Inn" though so that's cool I guess. http://www.youtube.com/watch?v=pE3oiKuU8UI http://www.youtube.com/watch?v=pE3oiKuU8UI

jeromec 16y ago
Yes, you're correct. The Fed I believe was forced to purchase many of the toxic securities directly. Many people don't understand just how severe and dire the situation was. One thing I'm not quite clear about is what happens at the individual home level with some of those securities. For each of the mortgages sent up to Wall St., who is the legal owner of it? I read somewhere that many of these mortgages were sitting in boxes in warehouses somewhere. If you've signed to repay a loan to a lender, how can those terms be enforced when rights to the loan are divvied up as securities?
- rbranson 16y ago
  The relation is like a futures contract to a commodity. You are just trading an abstract thing, not the commodity itself. CDOs are bonds created by the corporations that hold the assets, not assets themselves.
  - jeromec 16y ago
    Right, okay... so let's say I walked into my local bank and took out a mortgage, which was then sent to Bear Stearns, which then collapsed. JP Morgan Chase bought those assets, so I guess my mortgage would now be held by JP Morgan Chase...
    - btilly 16y ago
      No, actually here is what probably happened. Bear Stearns created a small shell company with a detailed and interesting charter. They loaned this company a large sum of money, in return for a set of bonds. The company used that money to purchase the loans from Bear Stearns. At this point Bear Stearns owns bonds whose value is approximately that of the loans. (Actually slightly more because the bonds are structured to better meet investor's needs.) They then turned around and sold the bonds to investors. One of those investors (in theory it doesn't have to happen this way, but in practice it does) gets both the most risky piece of the investment, and a contract to run the company by rules specified in the company charter. That investor is called the servicer, and they are responsible for the day to day activities of the company. Which mostly consist of collecting loan payments, paying out the bonds, and making detailed records available to any properly qualified investor. Once the last loan is gone, the company has no assets and goes away. Your loan is now owned by the shell company (which has no employees and exists only to shovel income from loans and send them out again as bonds), which is run by the servicer. JP Morgan Chase did not purchase any connection to this company when they bought Bear Stearns unless Bear Stearns chose to keep some of the bonds. (They did keep some from many deals, and purchased some from deals they didn't do, so they may be an investor.) Control is with the servicer. However it should be noted that the servicer's hands are tied by the charter, and there is very little flexibility in how they can choose to run things. Also note that once the deal goes bad, the servicer's incentive is to run the deal in whatever way maximizes the servicing fees they get. This has proven to result in decisions that are counter to the interests of both investors and people who owe the loans. For instance renegotiating a lower loan that people can actually pay generates less in servicing fees than taking a loan through bankruptcy court. Therefore the servicer often prefers driving loans into bankruptcy even though that is worse for everyone else. Now do you see why this is a mess?