Would you insure this?

Would you insure this?

So yeah, that’s pretty much it. Insure mortgage backed securities and all will be well in the world. As many folks have pointed out, there are some problems with this, though it’s not quite as brain dead as folks are making out.

1) To insure these things you have to know how likely they are to default. No one knows. It is doubtful anyone can know. If we did know, this problem would be much easier to solve.

2) For insurance to work you have to charge people what it’s worth. If there’s a 20% chance of default per year, the value has to be about 20% of what you’d pay out. Let’s assume we could figure out what the default chance was and charged that amount. The people who need it most couldn’t afford it, it would be too much. The reason they’re in danger of going bankrupt is because the probability is too high.

3) The house is on fire already. In many cases, these things are already effectively in default, it’s just that no one has said "uh, I don’t think the emperor is wearing any clothes." This would be the equivalent of calling up the insurance company and saying "Hey, I’d like to buy homeowner insurance because my house is on fire." They’d laugh you off the line. If they did decide to insure you they’d say "how much would it cost to replace your house Mr. Smith? We’ll charge you that much premium." In other words, there’s no point.

4) What this means is that either the government doesn’t charge them enough to afford to insure them, or it does. If it does, they can’t afford it. If it doesn’t, then the cost of the banks claiming their insurance payouts will be more than the cost of the premiums.

5) This means that the House bailout is actually the largest bailout suggested by anyone. What they’re saying is "minus premiums, we will pay for every single bad mortgage backed security in the system." I guarantee that will run to trillions and trillions of dollars.


Now, the idea of insuring certain types of securities is not a bad one. But the current crop of mortgage backed securities are not a good candidate because they include such a high proportion of fraud and because they include a lot of exotic variations that make them too hard to value. If the government (or anyone else) is going to insure something it has to be simple enough to understand and relatively fraud proof. The current batch is neither. Insuring something like money market funds, on the other hand, would make sense.

On top of that, I understand these fools want to decrease the capital gains tax to zero, which as Think Progress points out is completely pointless (people aren’t not investing because they are worried about taxation, they are not investing in these companies because they think they’ll lose everything they put in.) Heck, private equity firms raised 323 billion this year, it isn’t even that there isn’t plenty of capital slopping around, it’s just not interested in helping out insolvent financial institutions. The phrase "good money after bad" is probably going through a lot of investors minds.

And then there’s the deregulation foolishness, the idea being to allow companies to keep securities on book at their "maturity price" rather than their "market price". Since most of those securities are not going to mature at those prices, which is why the market price is so low, this is the equivalent of saying "let’s all just pretend that these securities are still good and that you’re not bankrupt. lalalalala, if I plug my ears and close my eyes the big bad financial crisis will go away!"

It is also a version of how the Japanese crippled their economy for going on 20 years now, by keeping zombie assets on the books of zombie banks, which then shuffled along unable to lend enough money to get the economy going.

So yes, Republican bailout ideas. Stupid. Doesn’t mean that what seems to be the current consensus Democratic plan is very good either, but at least it isn’t brain dead.

(Oh, and in the meantime the House Republicans stopped a 56 billion dollar bill which would have extended food stamps, employment insurance and so on. Glad to see they have their priorities straight.)

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  3. Individual Mandate – Public Option = Insurance Industry Bailout
  4. Anthony Weiner: Not Including Public Plan Will Cost Reform “100 Votes” in the House
  5. The Max Tax: Baucus Plan Fails to Control Growth of Insurance Premiums