Bailing out subprimes...what does this mean for the $ and the economy?

[grislyatoms]

I just read that some Swiss firm was writing off 10 billion due to this. Will this further weaken the dollar?

Are foreign investors going to pull the plug? This is getting scary. (I only have a rudimentary understanding of this type of thing)

[Firethorn]

From what I understand it's mostly financial institutions deciding not to raise interest rates like they could have when the initial rate runs out.

This costs them money they theoretically would have gotten; however it also prevents them from having to worry as much about people not paying and having to repossess and try to sell homes for fractions of what they loaned out.

Writing off the money shouldn't weaken the dollar more, but it can certainly result in less foreign investments in the USA.  Then again, you'd expect to see less domestic investment into subprime housing markets.

[Brad Johnson]

If it's the story I'm thinking of, they aren't actually "writing off" a $10 billion loss.  It's actually $10 bil less in interest they arereceiving over the life of the loan.  In other words they aren't losing anything, they are simply receiving less gain than projected.

It's in the same as when some dipstick reporter with an agenda tells you about a budget "cut" that is actually an increase.  Sensationalism sells airtime.

Brad

[grislyatoms]

Here's what I am not clear about.

Investors (foreign and domestic) will look at this as 10 billion in interest payments (I am assuming from what Brad said) not forthcoming.

Investors say "Well, that's now a crappy return, I am going to put my money elsewhere."

Lots of shares of XYZ real estate co. and real estate-related mutual funds and other vehicles flood the market, devaluing the shares.

Isn't this going to reverberate through the whole economy? Particularly if other big investors do this as well? If it's a big enough shock wave, won't it devalue the dollar more?

Perhaps I am confusing something with something else, or I really understand less of this than I thought.

[Brad Johnson]

It can't help but have some effect. 

Keep in mind these guys aren't the ones trying to middleman a couple of bucks out of brokering something to the investors.  These guys are the investors.  They didn't get hold of ten billion bucks sitting back and doing nothing when things got tight.  These guys don't just take lemons and make lemonade, they add some vodka and party it up.  Groups with pockets big enough to have ten billion bucks to invest, will have a strateeeegery for making something out of it.  There are all kinds of investor tricks to net out a profit, even on something like this.

Brad

[Matthew Carberry]

The key problem with the whole thing isn't non-performing loans, they were sub-prime and non-conforming for a reason, after all.  

The problem is how loans were bundled for sale to investors.  Instead of keeping conforming loans together and the sub-primes together, they bundled all sorts of loans together to provide, in theory, balanced risk investment packages.  Now, due to the intricacies of the market and the way loan receipts are separated from servicing there's no real way as an investor to tell how much actual "bad" debt you're holding until it falls out.

The big problem then is not the actual foreclosures, it's the investor uncertainty if they are currently, or going to be, holding the bag.

Investors who are shaky want to sell, but there's no one to buy with that much uncertainty.

These stabilization moves are designed to console investors that they aren't holding thin air.  But since the receipts by contract are what these bundles were valued at, anything securitized by them is now suspect as well.

I think it will work itself out without collapse.  After all, in the current financial world, all everyone has to do is believe and clap real hard and the money fairy will come back to life.  

As is typical, nothing being done has much to do with actually helping individual people (which is actually good, as any problems are their fault (in general)), it's about keeping the markets stable.