DEJA VU!!!!!!!!!!!!!!!!!

WASHINGTON — Wall Street may have discovered a way out from under the bad debt and risky mortgages that have clogged the financial markets. The would-be solution probably sounds familiar: It's a lot like what got banks in trouble in the first place.

In recent months investment banks have been repackaging old mortgage securities and offering to sell them as new products, a plan that's nearly identical to the complicated investment packages at the heart of the market's collapse.

"There is a little bit of deja vu in this," said Arizona State University economics professor Herbert Kaufman.

But Kaufman said the strategy could help solve one of the lingering problems of the financial meltdown: What to do about hundreds of billions of dollars in mortgages that are still choking the system and making bankers reluctant to make new loans.

These are holdovers from the housing bubble, when home prices soared, banks bought risky mortgages, bundled them with solid mortgages and sold them all as top-rated bonds. With investors eager to buy these bonds, lenders came up with increasingly risky mortgages, sometimes for people who could not afford them. It didn't matter because, in the end, the bonds would all get AAA ratings.

When the housing market tanked, figuring out how much those bonds were worth became nearly impossible. The banks and insurance companies that owned them knew there were still some good mortgages, so they don't want to sell everything at fire-sale prices. But buyers knew there were many worthless loans, too, so they didn't want to pay full price for the remnants of a real estate bubble.

In recent months, banks have been tiptoeing toward a possible solution, one in which the really good bonds get bundled with some not-quite-so-good bonds. Banks sweeten the deal for investors and, voila, the newly repackaged bonds receive AAA ratings, a stamp of approval that means they're the safest investment you can buy.

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http://www.huffingtonpost.com/2009/08/24/up-to-old-tricks-wall-str_n_267066.html

:nuke:

I saw a commercial on TV hawking "reverse mortgages for seniors". You, too, can have all the equity sucked out of your home.

I'd have a lot less problems with the bailouts if they'd been accompanied by a few people going to jail. All carrot, no stick, and no reason for them not to do the same again.

Nobody (Capital Market Investors) going to buy these bonds because ratings ("AAA") mean NOTHING to them, they have learned their lesson. However, capital market investors ARE interested in purchasing toxic/legacy assets at a discount providing the purchases can be financed through the PPIP program (Private Public Investment Plan). This is a plan where the investor puts up 10% and the US Gov. puts up 90% fincancing to complete the purchase.
The snafu is this: The banks are unwilling to sell these assets at discounted market value. The banks are holding these "assets" on their balance sheets at higher values.

This happened during the Latin American debt crisis of the 1980s and was called the "Brady Plan" after Treasury Secretary Nicholas Brady.

The idea is that the bonds will be different because of "over-collateralization."

In other words the mortgage backed securities that became toxic in 2007-2008 were supposed to get AAA ratings because of over-collateralization.

In fact, they turned out to be under-collateralized. Moreover part of the collateral was "credit enhancement" from investment banks that went bankrupt (eg credit default swaps).

Now that we have a sense of where bottom is, it's actually possible to repackage these and properly over-collateralize the mortgage backed securities, without derivative credit enhancement, and investors will be willing to buy them at face value.

Oh joy.

"Didja hear that, Ma? We can eat again. The De-pression is over at last".