Further Thoughts

Let's think about this further.

I asked, "Why is it better for the government to secure $30,000,000,000 in loans to secure JPMorgan's buyout of BearSterns instead of securing the same amount of personal mortgages?"

Clearly my answer is that it is not. I'd listen to arguments that the government should do neither. But if one accepts that the government should do something to help a waning economy then (directly) bailing out the big guys doesn't make sense to me.

If one took that $30B and used it to help people with mortgages going into foreclosure then we would be saving peoples' homes and the money would make its way to the big guys anyway and not just BearSterns but all the other banks that are in trouble.

I don't know what the exact rules would be but off the top of my head lets say that if an individual or family is about to file bankruptcy or go into foreclosure they could get help. The government could give them money to refinance their loan. A formula for the amount could be the lesser of 1) $100,000, 2) 1/3 the amount of the outstanding loan, or 3) 1/3 the value of the house. Furthermore the assistance would only be for primary residences not for peoples vacation homes or speculators. The rules would limit the help to $100,000 per person and not give special help to people that have over leveraged themselves. The $30B promised to JPMorgan would help 300,000 families if everyone of them got the full $100,000. But if I remember correctly the average home price across the country is a little over $200K. Assuming $225K (which I believe is high) then 1/3 of that amount is $75K. If that was the average amount that would be 400,000 families helped and that assumes everyone has a loan larger than the value of their house

Further more, I said, "Sure, its easier to secure the loans at the investment banks because its in one place and determining which individual borrower deserves a bailout and which doesn't isn't easy."

This is a jobs program! Sure, sure it is not as sexy as JFK's "going to the moon" project but it still works. I'm sure that there are many people in the mortgage business that have already lost their jobs and many more in danger of that. Some of these people could be reemployed to evaluate the loans that the program would be assisting. Home assessors would be employed to value a home.

Take a family with $150,000 outstanding loan on $200,000 home. They are about to default on their mortgage and apply for the federal assistance. A loan adviser would evaluate their loan and verify it is the family's primary residence. A home assessor will determine the value of the family home. The family will get a $50,000 grant from the government - it won't be a check, it will be paid directly to the mortgage holder. The existing loan will be paid off using the grant and by refinancing the home.

Who wins? The mortgage holder and investment banks that hold the loan. The bank / mortgage broker that gets the commission on the refinancing of the loan. The family that gets a $50K bump in the equity of their home and a lower mortgage payment. The economy since the loan officer and the home assessor that have more work and money, the investment bank that gets paid on a risky investment has more money to pump into the economy, the family has more disposable cash.

No brainer, right?

As I said, I could accept a do nothing solution. People and businesses got themselves into this mess and if they don't suffer the consequences then they won't learn their lessons. But apparently the powers-that-be have already determined doing nothing is unacceptable and they are using tax payer money to do something. Whatever happens, since we're obviously going to bail people and businesses out and they won't learn their lessons, new regulations need to be put in place to stop history from repeating itself.