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Housing and the $1.8 Trillion Bailout

Written By Brian Hicks

Posted September 24, 2008



Could….Should… May…. Might…. And we hope.


Those were the words that filled every answer yesterday as Ben Bernanke and Hank Paulson testified before Congress looking for a blank check to fix the financial crisis.

And to their credit, the assembled Senators were less than impressed. Some, in fact, were downright hostile.

That cast something of cloud of over what the final result of this mess will be, even as chairman Bernanke warned the costs of doing nothing would be much worse than what they were asking for.

But the one thing everybody did agree on was that housing was the “root cause” of this entire mess.  On this point there’s no debate.

However, the problem is that housing still has further to fall. That makes coming up with a real price tag on these losses nearly impossible. Moving targets are hard to price.

Meanwhile, the drop in housing keeps up its steady drumbeat to the bottom while the debate on how to fix it all rages on.

Here’s the latest.

It’s from Bloomberg by Bob Willis entitled: Home Resales in U.S. Fall 2.2% to 4.91 Million Pace

“Sales of previously owned U.S. homes fell more than forecast in August and prices dropped the most on record, a sign the market remained in a slump heading into the latest financial meltdown.

Sales of existing homes dropped 2.2 percent to an annual rate off 4.91 million units from 5.02 million the prior month, the National Association of Realtors said today in Washington. The median price declined 9.5 percent from August 2007 and the number of properties fell from a record.

The collapse in lending that brought down American International Group. Inc. and Lehman Brothers Holdings Inc. this month may also make mortgages more difficult to get. A lack of credit raises the odds sales will again slump after hovering around a 10-year low this year, even as borrowing costs drop.

“The headwinds facing housing have intensified,” Peter Kretzmer, a senior economist at Bank of America Corp. in New York, said before the report. “Delinquencies and foreclosures continue to rise while credit conditions remain tight.”

Home resales were down 10.7 percent compared with a year earlier. Resales totaled 5.65 million in 2007.

Today’s figures compare with the 4.85 million level reached in June, the lowest in a decade and 33 percent down from the record reached in September 2005.”


So as housing defaults and falling prices destroy one business model after another, the costs to keep the “system” afloat continue to spiral out of control

That’s because the $700 billion bailout package is just latest effort in this mess—not the first. In truth, there have been many others.

In fact, the real bill to date is actually $1.1 trillion more than the government is asking for this time.

So if the latest bailout passes Congress late this week the tab for it all will suddenly jump to $1.8 trillion.

That’s almost three times the current total cost of the Iraq War.

Here’s a look at the actual tally including the current proposal.

From CNBC:

  • Up to $700 billion to buy assets from struggling institutions. The latest
    plan is aimed at sopping up residential and commercial mortgages from
    financial institutions but gives Treasury broad latitude.
  • Up to $50 billion from the Great Depression-era Exchange
    Stabilization Fund to guarantee principal in money market mutual
    funds to provide the same confidence that consumers have in federally
    insured bank deposits.
  • At least $10 billion in Treasury direct purchases of mortgage-backed
    securities in September. In doubling the program on Friday, the
    Treasury said it may purchase even more in the months ahead.
  • Up to $144 billion in additional MBS purchases by Fannie Mae and
    Freddie Mac. The Treasury announced they would increase purchases up
    to the newly expanded investment portfolio limits of $850 billion
    each. On July 30, the Fannie portfolio stood at $758.1 billion with
    Freddie’s at $798.2 billion.
  • $85 billion loan for AIG, which would give the Federal government a
    79.9 percent stake and avoid a bankruptcy filing for the embattled
    insurer. AIG management will be dismissed.
  • At least $87 billion in repayments to JPMorgan Chase  for providing financing to underpin trades with  units of bankrupt investment bank Lehman Brothers  Paulson said over the weekend he was adamant that public funds not be used to rescue the firm.
  • $200 billion for Fannie Mae and Freddie Mac. The Treasury will
    inject up to $100 billion into each institution by purchasing
    preferred stock to shore up their capital as needed. The deal puts
    the two housing finance firms under government control.
  • $300 billion for the Federal Housing Administration to refinance
    failing mortgage into new, reduced-principal loans with a federal
    guarantee, passed as part of a broad housing rescue bill.
  • $4 billion in grants to local communities to help them buy and
    repair homes abandoned due to mortgage foreclosures.
  • $29 billion in financing for JPMorgan Chase’s government-brokered
    buyout of Bear Stearns in March. The Fed agreed to take $30 billion
    in questionable Bear assets as collateral, making JPMorgan liable for
    the first $1 billion in losses, while agreeing to shoulder any
    further losses.
  • At least $200 billion of currently outstanding loans to banks issued
    through the Fed’s Term Auction Facility, which was recently expanded
    to allow for longer loans of 84 days alongside the previous 28-day

That’s $1.8 Trillion and counting—all of it on the backs of the prudent to save the reckless. And all we can get from the people in charge of this mess is a giant “We’re not sure”

That’s not real encouraging if you know what I mean.