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Short the Banks?



April 29, 2008 – Comments (6)

Market Ticker has an interesting post about government bailouts for homeowners, and I make no claims about understanding what happening here.  I don't know the details at all, and the post doesn't help me to understand the details.

However, the claim MT is making is that the wording on these things would put the government first in line to get paid out, and banks would have to mark their paper to about 5c on the dollar...

6 Comments – Post Your Own

#1) On April 29, 2008 at 10:15 PM, dwot (28.81) wrote:

A  couple similar posts, both on the Shiller index...

The mess that Greenspan made... 


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#2) On April 29, 2008 at 10:39 PM, Imperial1964 (93.41) wrote:

Yeah, I doubt the proposal could pass as is.  I read it quickly, but here's how I understood it.

The government would make loans to homeowners in need.  But instead of this being a seond-lein, this would be senior to the first mortgage, jumping to the front of the reayment line, in front of any existing first-lein.

I don't quite buy Karl's doomsday warning that this turns first-leins into second-leins, and as such first-leins are worth 5c on the dollar, as some HELOCs and second-leins are.  It does devalue first-leins, but I doubt the size of the government loans would be substantial enough to render first-leins worthless.

In fact, I'm quite sceptical that such legislation will pass congress.  Especially with all the money the banks pay to congressmen.  I mean pay to congressmen's campaigns. 

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#3) On April 29, 2008 at 10:57 PM, dwot (28.81) wrote:

I remember living this life...  It wasn't much fun...

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#4) On April 29, 2008 at 11:00 PM, dwot (28.81) wrote:

Imperial, interesting...  I don't understand why they would be writing loans.  That sounds like just putting the people further in debt...

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#5) On April 30, 2008 at 8:52 AM, leohaas (30.08) wrote:

Of course, the tax man is always first in line! That's the way it SHOULD be.

Listen, if they are going to use government money to help borrowers in distress (I am not in favor of that, but it IS going to happen--the basic idea has bipartisan support), then they HAVE TO make repaying that money the highest priority. If they don't, us taxpayers end up footing the bill.

So, now the banks will bleed. Rightfully so. They should have been more careful when writing all those junk mortgages.

For the investment community to take advantage of this opportunity, I would:
 - sell any bank or banking-related stock
 - short (or buy a put on) XLF.

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#6) On April 30, 2008 at 9:30 AM, dwot (28.81) wrote:

leohaas, I'd agree taxpayers shouldn't be footing the bill.

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