My neighbour was keen to see me when we met again over the backyard fence.
‘I had lunch at the business club, and my friends including one banker were interested in my retelling your comments. They were also impressed with my new found knowledge. The banker, who knew you said you were right on the ball, and he too was concerned. I would like to hear more, if you have the time.’
‘Give the banker my regards when you see him again. As I was saying before, the credit crunch which started in August keeps going on without end, and it may start affecting the world economy if credit remains tight. On the light side, and my heart bleeds for them, some plastic surgeons in America are complaining of the slowdown in demand, due it is said to the mortgage credit crisis. Poor critters! It might spoil their Christmas.’
‘My banker friend specifically asked me to check with you on the two lifelines being brokered by the American Treasury headed by Henry Paulson. He said that if the debt king thought they were going to make a big difference and free up the debt market, that would allow him to relax a little.’
‘One of the plans is to rescue the home owner facing foreclosures on defaulting home mortgages. The other plan is the “super siv” fund to essentially free up the asset backed commercial paper market, which is currently frozen. For once, Uncle Sam is not being asked to rescue the home owner, or the big American banks and investment banks. The lenders are being asked to shoulder the burden themselves.’
‘But how are these rescue plans expected to work,’ my neighbour asked.
‘Henry Paulson, George Bush’s Treasury Secretary is one smart cookie as the former chairman and chief executive of Goldman Sachs, the world’s largest investment bank, which at times seems to float on water, so successful and so lucky they are to escape from tight situations. They are the magicians of the financial markets. Goldman seems to have escaped unharmed from the credit disaster, and its reputation enhanced.’
My neighbour was getting a bit impatient. He reminds me at times of a lot of people, who want the explanation and solution in short order time. He is a bit like the shock jock radio hosts who dominate talk back programs with instant solutions.
‘Keep to the point’, the neighbour said. ‘I want to go back to the Business Club tomorrow. I need to understand whether these Paulson plans are going to work or not. I don’t want to make a fool of myself.’
‘These schemes may be of limited help. But it’s going to take a lot more than what has been proposed to get out of this financial mess.’
‘The subprime plan involves home owners who took out adjustable rate mortgages (ARMs), which offer teaser interest rates on the first and possibly second year of a mortgage, which is then ratcheted upwards in later years. Why these people didn’t take out a 30 year fixed rate mortgage in America, which is the time honoured method of financing home ownership makes me suspicious about the whole of the ARM debacle.
‘The deal won’t provide relief to many subprime mortgages, such as borrowers already in foreclosure, have already refinanced their homes, or are more than 60 days delinquent on more than one payment over the past year. Some people with good credit history will be excluded, along with people able to afford the higher interest rates.
‘Allegedly, the scheme might help as many as 1.2 million homeowners, assuming loan servicing companies agree to freeze the mortgage rate at the introductory teaser rate for up to five years. But one critic, Calculated Risk, commonsenseforecaster.blogspot.com December 8 2007 thinks that the rescue plan will involve maybe only 145,000 mortgages. So that the rescue plan will turn out to be no more than a drop in the bucket.’
My neighbour said: ‘let’s stop now as it’s getting late. I’ll put off my luncheon date a day or so, and perhaps we could continue tomorrow.’
‘Sounds fine. Bye for now.’
