exercises in compound storytelling

Friday, September 26, 2008

numbers numbers

I can't wait to see how this bailout drama plays out.

Initially I was concerned when I heard various Senators saying "how could $700 billion be enough? It'll cost at least a trillion" or some such; that sounded to me like the voice of the vigorish: 700 plus 300 to play.

Then various Senators began asking what the $700 billion was for, and frankly that turned out to be a fair question. As far as I can tell someone pulled that number out of thin air.

"I'm not about to give a $700 billion appropriation to a secretary I don't know yet," says Dodd.

That's a quote from Senator Chris Dodd, Democrat from Connecticut, saying that he's not willing to sign off on a lump sum when the person responsible for handling the money will change in four months. I'm not sure how to parse that: am I supposed to believe that Senator Dodd would be more comfortable if he knew who the next Secretary of the Treasury would be? Should Senators McCain and Obama submit the names of their promised Treasury nominees to Dodd for approval? Would he sign off on more money if he were happier? etc.

As I understand it the money would be used to buy up mortgage-backed securities that are below some quality line: perhaps some percentage of the underlying mortgages are in default, perhaps some extrapolated number according to the mix of prime and sub-prime mortgages. The federal government would then apparently arrange for the orderly foreclosure and sale of the corresponding houses. Some people see this as potentially good news: the Government would then have another reason for the housing market to rise: it wouldn't just tax capital gains, but would actually have active investments in the housing market.

I for one don't buy it for a second: I can't imagine the Federal government hiring the appropriate people fast enough. I'd expect instead that the government would end up owning the equivalent of a heterogeneous collection of FEMA trailers. More likely they'd sell them off at a bigger loss. It might be orderly, but it wouldn't be profitable.

In the meantime, I'd love to see someone explain what the historic default rate for mortgages is and how it has changed. I can't seem to find that number either. So far I've only found this article from the New York Times, from August of this year. It doesn't really give the right numbers: it's focused on a supposed spread in defaults from sub-prime mortgages to prime mortgages, which doesn't fit the usual narrative about how the problem started with mortgage companies making bad sub-prime mortgages by submitting fraudulent qualifications for marginal borrowers. That shouldn't have been happening to prime mortgages too. Regardless, I have yet to see what the default rates are across the board, in all three (prime, alt-A, and sub-prime) categories, so I can't estimate how many houses would be involved.

If I were a Senator I wouldn't sign off on any of that stuff without those numbers.

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