I thought I'd share some thoughts from Ryan Pfenninger of MarketRiders, who was adamant that yesterday was a bad day for trying to reach consensus on the mortgage bailout. His thoughts are worth understanding. House Republicans are trying to remember what fiscal conservatism means. After eight years of writing checks to fund anything and everything the Bush Administration sought, these members of Congress remembered they must stand for re-election on November 4th.Apparently, they believe that standing behind conservative fiscal ideologies for the next 40 days will keep them in their seats in Washington.
No one can blame them for disliking the so-called Paulson Plan. Let's consider the most recent set of facts:
- Are we really going to rely on the same people who led us into this mess to get us out? It is entirely possible that had Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) reform legislation been passed two years ago, the scale of the current economic mess would be greatly reduced.
- Several financial experts are discussing how the taxpayers will make money on their $700 billion investment. But investing in bad mortgages is not like investing in distressed companies. If you invest in a distressed company, the company can right itself and provide a good return. If you invest in a second mortgage that was written on a house valued at twice what its currently worth, the odds are slim you will ever see a positive return on that investment.
- Secretary Paulson's plan would entitle him to purchase assets from any financial institution – not just AIG. When asked if this would allow him to purchase from pension plans, he said yes. How does purchasing from a pension plan help the homeowner facing foreclosure or the bank who can't afford to lend any money?
- The plan does not seem to differentiate between the types of loans that the government can purchase. There is a big difference between purchasing a first mortgage on a property and purchasing a no-documentation loan or home equity line of credit. We may have a chance of recouping money on the first mortgage; we have little to no chance on the others.
- Where are the details? Three pages aren't enough for anyone to feel comfortable spending this kind of money.
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