President Bush addressed the nation tonight to discuss the rescue of the financial system. Although his address was basically correct (understandably basic), there was a portion which was misleading. I am not sure if this was intentional or was the result of ignorance.
The portion in question was when he stated that most of the borrowers who make up these troubled mortgage-related vehicles will make the effort to pay their loans. Not so George. Many of the troubles mortgage-related CDOs (we won't even discuss the more exotic structures) are made up of loans which are backed by properties so under water and borrowers who are so financially strapped, they have no intention of paying. They just want out of their properties. Many of these loans are backed by vacation or (especially) investment properties. These borrowers want out of the properties, not to be bailed out.
Also, President Bush makes it sound as though the problem is with plain-vanilla mortgage backed securities. Again, this is not the truth. These Collateralized Debt Obligations (CDOs) are made of of the riskiest loans known to man and are sliced and diced into tranches with different levels of seniority and cashflow horizons.
Again, the talking heads on the news (this time Fox) said that the President should explain to the public that it may not actually cost $700 billion as the government would by these assets at 10 cents on the dollar (Tracy Byrnes). The banks would be crushed if the assets were bought at even 40 cents on the dollar. Many of these assets have not been marked that low on balance sheets. Some have not been marked at all. Why is everyone so clueless out there?
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