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Thursday, September 25, 2008

Reports: Paulson Plan Deal Near

by Calculated Risk on 9/25/2008 09:18:00 AM

From the WSJ: Bailout Pact Gains Momentum Amid Push for Tough Controls

A likely bill would include limits on executive pay in situations where the government puts a large amount of money into a failing institution. In certain cases, the government could receive warrants that would give it the right to acquire shares in the company. Also included is beefed-up oversight through the Government Accountability Office, an investigative arm of Congress.

Likely not included is a controversial idea to let judges alter the terms of mortgages during bankruptcy proceedings.
The real question is the price mechanism for buying securities.

Vikas Bajaj writes in the NY Times: Plan’s Mystery: What’s All This Stuff Worth?. See the story about the Bear Stearns Alt-A Trust 2006-7.
Bear Stearns bundled the loans into 37 different kinds of bonds, ranked by varying levels of risk, for sale to investment banks, hedge funds and insurance companies.

If any of the mortgages went bad — and, it turned out, many did — the bonds at the bottom of the pecking order would suffer losses first, followed by the next lowest, and so on up the chain. By one measure, the Bear Stearns Alt-A Trust 2006-7 has performed well: It has suffered losses of about 1.6 percent. Of those loans, 778 have been paid off or moved through the foreclosure process.

But by many other measures, it’s a toxic portfolio.
This is the problem when you hear about the losses associated with a Trust. In this case the overall losses are only 1.6% so far (but this is Alt-A so it will get much worse), but many of lower tranches have been wiped out.

We don't know if Paulson will overpay for assets - losing money for the taxpayers - and that is why warrants are necessary.