This is the part of nationalization that is not semantics. We need to talk about CDS positions, and it’s remarkable how quiet the press has gotten on this subject. Item: How is it that AIG burned through scores of billions of dollars, and now is writing down $60bn more, and they’re back to the trough for another load of money? Where did the money go that we already gave ‘em?

Similar thing with C: They can’t go through so many billions just on business operations. Where did the money go?

I suspect this is about (1) paying off wrong way CDS bets, and (2) posting more collateral (to satisfy CDS contract terms) as their stock price goes down.

So. as Geithner keeps pouring more cash into C and AIG, what happens to it? The stock holders continue to hold tradable paper; the bondholders get paid; preferred gets paid; and gambling debts get paid. I resent taxpayer money paying off gambling debts, though I don’t mind bonds and preferred getting paid–that’s honest work. I don’t even mind CDS’s getting paid if the owner of the CDS holds the underlying security.

Now. Formal nationalization is the bomb. Liquidate and let the creditors line up and see how far the money goes. Surely the United States is not going to honor all gambling debts with C and AIG in receivership.

Possible third way…. No formal nationalization. But Treasury intervenes on CDS’s, and declares that those holding CDS calls on C and AIG, who do not own the insured securities, have void contracts, and they will get their premiums back. Other CDS holders have viable contracts that will be honored. This way, equity, bond, preferred holders, and legitimate CDS holders, get paid; and the gubmint’s money goes a lot further–simply by cancelling gambling debts.

The banks/investors are allowed to take up to 3X the actual dollar amount of the loss (principal reduction given) on their balance sheets and for tax purposes at the time of the individual refinance, as a aid to help them stay solvent. (goal is a leverage ratio of 10:1)

The foreclosed home would allow and charge the former homeowner a reduced rent for up to 1 yr or until the house is sold to avoid homelessness and vacancy. If the rental payment is not paid to the bank for 60 days, on the 61 day eviction occurs.

Regardless of the who the holders of the mortgages are, ALL homeowners are eligible, it is a government mandate. ( the other way is to buy all toxic mortgage assets from the banks for the true price that is definately less than the appraised value, somewhere around 25-30 cents on the dollar)

An option will be given to holders of MBS pools that for the entire pool of homeowners affected they can accept a reduced payoff amount in lien of foreclosures or a replacement mortgage at the reduced mortgage amount and stipulated interest continuing the cash flow of the pool. ( servicers are released from responsiblity of deciding, the owners of said pools decide or reduced payoff will occur for the entire pool)

Originally any foreign country that holds a security interest in a MBS, will be entitled up to full principal balance based on the purchase price , all interest payments already paid will be added to principal balance payoff, but investing is a risk. I will leave this up to the government, but under no circumstances will interest be paid.

All derivatives or CDS placed on MBS will wash each other out ( net) with other companies that it was made with . Any CDS bet placed on a MBS that did not have an underlying monetary interest in the capital (pure bet) will return the premium paid. Any CDS bet that recieved a premium for a MBS that it did not have an underlying monetary interest in, will return the premium received. THE ONLY CDS that should be in effect is a CDS that a premium was paid on the investors/holders own monetary capital investment that they are still holding and there was no additional counterparty risk involved. There should be complete cooperation between the parties of Wall Street, erasing the CDS since none had sufficient capital to place said bets to begin with. UNDER NO CIRCUMSTANCES ARE THE TAXPAYERS RESPONSIBLE FOR BETS MADE/PAID. Let the negioatitons begin.

My proposal is for the government to mandate the recall, reduction and replacement of all defective mortgages. The banks had prior professional knowledge that their actions of discounting massive Reo’s into the market would lower property values financially harming other existing customers with negative equity. A defective mortgage is when part of the “mortgage” has become an unsecured loan ( negative equity) with a partial secured lien.

There is 12.1 Trillion Dollars in outstanding mortgages of which appr. 20-25% already have negative equity.If all 25% had to be principal reduced to match appraised values, the total cost to cure to be shared by all holders of mortgages is 1.2 Trillion Dollars. Exactly how much of that 1.2 Trillion Dollars are banks actually holding?

All owner occupied underwater homeowners are entitled to a principal reduction to appraised value in the mandate, the delinquent homeowners are the only ones to subject to income qualifications guidelines.

The government and the banks need you to remain stupid and responsible, if you are current with your mortgage. Don’t worry that you are locked out of the refinance market by having the rules changed in the middle is not fair. The industry had allowed for no income and ratios to 50% to qualify you for the mortgage initially, but now the industry is stating if you can prove your income and have equity regardless of what we previously allowed and that our actions that have caused you financial harm, you are only entitled to a refinance if you put down over 20-30-40-50% as a down payment and are under 28/36% ratio’s. Keep the paying customers is the motto, only worry about the delinquent, no moral hazard here.

If you can not qualify under the new guidelines, regardless of whether you are paying and actually can afford to continue to pay, you are should be responsible for your long term investment because we need you to pay us at the higher interest rate instead of us being responsible party. Only the homeowner’s who realize that it will take them 10 or 20 years to pay off our unsecured loan, will benefit with any modifications or principal reductions, by becoming delinquent since they are costing us money.

When an investment is losing money, most people get out of the investment. The banks want the homeowners who are paying their mortgages to continue to pay, even though it is a losing investment. How long do you think it will take before the government forces all banks to acknowledge the loss, or will it wait until the government owns all of the losses?

There are 3 basic rules- 1- owner occupied, 2- citizen or resident alien and 3- the new mortgage payment has to be lowered or will be lowered (deleveraging of the US household)

Current but underwater, automatic reduction to appraised value, no income or ratios needed, this group is a good credit risk. A new 30 yr fix rate mortgage is issued at the suggested interest rate of 5.5%. No appreciation profit allowed for 5 yrs.

Current but at market value or below, a no cash out refinance up to current appraised value at the suggested interest rate of 4.5% FRM

Delinquent but underwater, an automatic principal reduction to appraised value allowed SUBJECT to sufficient income qualifications for a 33/41% at the suggested interest rate of 6.5%. No appreciation profit allowed for 10 yrs ( equity pay down also allowed for all groups). If the homeowner can not qualify with the REDUCED principal mortgage payment, the home is foreclosed on ( they don’t or maybe never qualified)

All Reo’s will be sold at current appraised values, no discounting allowed. New Homebuyers are eligible for the interest rate of 4% subject to normal underwriting guidelines. If found that the qualified potential borrower pool is insufficient , a government 10 yr forgiveable grant will be given to subsidy the principal and interest payments of lower income borrowers.

Elimination of all negative equity, elimination of all present and future toxic mortgages, lower capital reserves requirements, increased spending power of the public, increase revenue of the banks to pay back TARP, creation of jobs are just a few of the benefits of making capitalism the word of the day instead of nationalism.

Right, but what is demand? I may want a Ferrari, but that’s not demand. If I produce value and offer it in trade for a Ferrari, then that is demand. In a financial/debt/currency crisis I am impeded in creating value because I cannot make cooperative deals with other people.

Agreed on your other points.

Am I making sense?”

Of course. However, always remember tha capital flows in public markets are not all there is to the world economy. There is a huge chunk of private investment (done by governments as well as individuals) that continues to do all the above. One caveat I would make is that a depression is caused by demand destruction, not lack of value. The ultra concentration of profit is what caused this one and the last one.