Worthless Paper and the Financial System Meltdown

I don’t chime in here much anymore, mainly due to being somewhat intimidated by my more literary partner. But the time has come for a little tidbit (rant) from me. Today I heard several talking heads on major news networks chiming in about the the financial crisis our nation is facing. We all know that the basis of the entire problem is the devaluation of real estate, which has dominoed through the entire financial system worldwide. But what amazes me is the disinformation they are spewing. As Congress tries desperately to digest the deficiencies of the three page (yes, three pages will take care of this problem) proposal from the Treasury Dept./Fed, Exhibit “A” is the catch phrase of the day on cable networks – “How do you deal with or value paper that is worthless?” For the uninitiated, were talking mortgage loan debt who those, supposedly in the know, refer to as “Paper.” Excuse me?

This is where irresponsibility breeds chaos. The “Paper” we are referring to is NOT WORTHLESS! Can you, the so-called experts, get this one basic thing right? Or would you prefer to set off more global panic in the financial markets? What are we really talking about here?

The basic concept is that the U.S Government is stepping in because the lenders (banks, mortgage companies, exotic overseas investors, etc.) did not have enough reserves to cover a downside market. As they allowed the borrowers to over-leverage, the lenders over-leveraged themselves, too. Why not do that? The market is always going up? Then these same idiots that effectively created the market for this “paper” panicked. (“Oh crap, did we really buy/finance a gazillion loans where there was no down payment and no income verification?”) We can all bitch about the abuses of the past and we can lament the downward spiral in home values, but I can tell you confidently that the paper is not worthless.

Take a typical culprit in San Diego, for example.  Someone bought a $500,000 home at the peak of 2005-2006. Even if they put $0 down (meaning for those not thinking quickly here, a $500,000 mortgage, or “paper”), that home today is, say, worth 20%, 30% or even 40% less (you pick the number). For our example, let’s use the BIGGEST decline in value of 40%. So today, the home is worth $300,000. That is far from worthless. The plan is for the U.S. to buy this “paper” and hold it until it may be sold to an investor for an amount equal to or greater than its value today. The U.S. government is not an investor, constantly worried about returns on their investment. Maybe they should be, but they have staying power. They can just sit back and wait. If the value goes down further, so what? Some day it will come back, and that’s when they will sell the paper and get their (our) investment back. We (the citizens) may even get a profit, eventually.

I pity the poor politicians who have to sort this mess out now (although their lack of proper oversight made this an accident waiting to happen), but it makes me crazy when the so-called pundits in the media call the “paper” worthless because it’s disingenuous to say so, and they should know that. If someone truly thinks that home that was purchased for $500,000 and is now worth $300,000 is really worthless, please sell it to me for $100,000. I will buy all the homes you can sell to me, and I will be happily retired in less than a year… if I can just get a loan.

Now I am reminded why I don’t write anymore.

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