The always insightful Arnold Kling wonders just how badly Washington will get taken in the Mother of All Bailouts:
Let's see if I get this straight. There are a whole bunch of mortgage-backed securities, the value of which is not known, because nobody knows what the default rates on the underlying mortgages are likely to be. A government agency, Bailie Mae, is going to put up, say, a billion dollars. Companies will make offers. It might go like this:
1) Shake-E Bancorp offers to sell securities with a face amount of $1.4 billion for $700 million. 50 cents on the dollar.
2) Shift-E Investments offers to sell securities with a face amount of $1.2 billion for $720 million. 60 cents on the dollar.
3) Slime-E Insurance offers to sell securities with a face amount of $1.0 billion for $900 million. 90 cents on the dollar.
4) Bailie Mae then buys $700 million from Shake-E (the entire $1.4 billion face amount), $300 million from Shift-E, and leaves Slime-E to pound sand.
It sounds to me as though Bailie Mae is going to be wearing a big sign around its neck saying, "Adversely Select Against Me." For all we know, Slime-E's offer was the best deal. Recall that we stipulated that we don't know what the securities are really worth. That's what makes "hard-to-sell assets," you know, hard to sell.
Once upon a time, Bailie Mae was supposedly going to help home owners. I guess when push comes to shove, the real bailout money goes to financial institutions, not individuals.
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of 4:08PM September 19, 2008