But probably a fair price.

We already know that the default rate on most of the MBS paper will be around 5%, with a maximum of probably no more than 10%

No, we don’t. You can’t have it both ways – either the MBSs are too opaque to calculate default rates with such accuracy or they aren’t too opaque to calculate expected default rates with reasonable accuracy and everyone should stop bitching about the opacity of MBSs. Which is it?

If it’s the former, it’s unlikely that government numbskulls running the world’s largest distressed debt hedge fund, bankrolled by taxpayers to whom they are not accountable, will be able to figure out that they are buying the riskiest, most overpriced crap. If it’s the latter, then every distressed debt hedge fund will be bidding for those assets and we don’t need Paulson’s team of government morons to do it for us.

We’re screwed – and that’s my optimistic prediction.

The problem is the loose lending standards and undeserved high credit ratings. The ABS is only as good as its underlying assets. Recently, the loans comprise the underlying assets of the MBSs worth a lot less because they lever people more than we could dream of levering LTCM in the 90′s and because there was virtually no due diligence done on borrowers. That’s the basic problem, not the ABSs – MBS or otherwise. Credit card ABSs, for example are working well. However, credit cards haven’t loosened their lending standards as much and they still stick to arcane rules like actually doing credit checks on prospective borrowers [/sarcasm].

I think epobirs has pointed out one problem with this idea: because of the bundling of mortgages into synthetic packages, we see a problem of asymmetric information. I could readily imagine that *some* of the mortgage-backed securities out there are toxic garbage, based on semi-fraudulent housing valuations or deliberate sorting of loan quality into different tranches – and those securities sure as hell won’t have the 75 to 90% face value that they should. If sellers can’t readily figure out which offerings are which, they won’t buy (classic ‘market for lemons’ problem).
Of course as you pointed out the expectation of a bailout also discourages sellers from pricing low enough to move their paper in spite of this problem. I believe that Merrill Lynch was forced to accept 0.22 on the dollar for its paper, which is a pretty brutal loss.

I think epobirs has pointed out one problem with this idea: because of the bundling of mortgages into synthetic packages, we see a problem of asymmetric information. I could readily imagine that *some* of the mortgage-backed securities out there are toxic garbage, based on semi-fraudulent housing valuations or deliberate sorting of loan quality into different tranches – and those securities sure as hell won’t have the 75 to 90% face value that they should. If sellers can’t readily figure out which offerings are which, they won’t buy (classic ‘market for lemons’ problem).
Of course as you pointed out the expectation of a bailout also discourages sellers from pricing low enough to move their paper in spite of this problem. I believe that Merrill Lynch was forced to accept 0.22 on the dollar for its paper, which is a pretty brutal loss.

If a believable market value cannot be assigned to these items, then they are worth NOTHING. Game over, thanks for playing. The failed financial companies should not be propped up. The only thing that matters is the depositors’ funds. Let the foreclosed properties be seized and auctioned off for dirt cheap (many of these are so dilapidated they can only be valued by the land minus the cost of removing the structures so the buyer can start anew) with the proceeds going to the FDIC to protect the consumers.

People need to get over the fallacious belief that this can all be fixed with the stroke of a congressional pen. There is some seriously broken stuff that is completely FUBAR. You can’t get on with the cleanup until you accept that a bunch of stuff is lost and not coming back. Get rid of the market distorting nonsense like the CRA and get on with a life based on the world as it is rather than the world as it should be in socialists’ dreams.

Why?

The alarm has been raised repeatedly from the right and the left squelched it every time until we got to where we are now. If the general public could be made to understand how this is almost entirely the product of the left’s policies there would be a mass evacuation of left-held seats and not a chance in hell of Obama being elected dogcatcher. But most people aren’t interested if the 6:00 News doesn’t tell them who the bad guys are in simple language that doesn’t ask them to really think. Not that the average news broadcast will even give a hint that something called CRA might be part of this story.

It was some choice, some government mandates (like the CRA), some lulling into a false sense of security by the existence of Fan & Fred.

Credit spreads tightened across the board on all loans. That part was choice.

Is that untrue? Was this all a simple matter of choice? (Screwed-up choice, I mean, but still just a choice?