On Bond Insurance, Or, The Ongoing Train Wreck You Barely Knew Existed

It’s time that you and I had a little talk, my dear reader, about a subject your Mom and Dad never really explained that well. It’s gotten to a point where it is affecting your daily life, and you probably don’t even know why.

They didn’t cover it well in school, either, and if they had it likely would have just been one of those things you make jokes about later in the locker room.

That’s right…it’s time we discussed bond insurance, collateralized debt obligations…and how all of this is hitting you right in the wallet—and some comments about what’s coming next.

In other words, complicated economics, simply explained.

First things first: how does all this stuff affect your daily life?

For starters, these topics are the source of a lot of the bad economic news you’re hearing these days. If the value of your house is going down while your payments are going up…or your neighbor’s house is being foreclosed upon…or if India’s Tata Chemical Co. just bought the soda ash plant where you work…it’s already affecting your daily life.

If you invest (and that includes those of you with 401-Ks who might hope to retire someday) and you’ve been watching the Dow Jones Industrial Average (or your stock’s prices) slide downward this could be an even bigger part of your life than it is today—but as I said, I’ll explain about that before we’re done.

Trying to borrow money? This is a huge part of your life--so pay attention, and I’ll do my part to make it worth your while.

Are you an American who buys imported goods (don’t we all?), is thinking about a European vacation, or one who likes to hop over the Ambassador Bridge and spend a Saturday night out in Windsor? Notice how all those things are suddenly more expensive? This story affects you, too.

So exactly what is it we’re talking about?

All kinds of entities in “the market” have been investing in what are called “Collateralized Debt Obligations” (or other variations on a similar theme). The name seems quite esoteric, but actually it’s rather easy to understand, once it’s explained.

The way this works is you and I go out (along with thousands of our closest friends) and borrow money from our “friendly local bank” in the form of mortgages or equity loans. Our “friendly local bank” is limited in how much money they can lend—but if they can “sell” these loans to another investor they can use that money to make more loans…which means more “loan servicing” fees for the bank, and more interest money, over the long term, for all the investors.

Instead of selling one loan at a time, the loans are grouped together into “packages” of loans worth millions of dollars (the “Debt Obligation” part of the name of these “investment products”). Everyone who lends money loves collateral, and of course you can always foreclose on a house if the owner quits paying, which is where the “Collateralized” part of the name comes from.

And thus we have “Collateralized Debt Obligations”…also known as CDOs.
Make more sense now?
Let’s forge ahead.

So who might these other investors be? For starters, names that you’ve probably been hearing in the news, such as Merrill Lynch, UBS, and Citigroup. Other countries have been putting their nation’s money to work in these investments as well—and when national treasuries invest, they usually establish what’s known as a “Sovereign Wealth Fund” (simple translation: China’s money, or Dubai’s money, or…well, you get the idea)—and China, who really needs the money at the moment, has been very active in this market.

Now if you’ve been thinking about all this you might be saying to yourself: “Self, how can people in Dubai invest in the loans we took out at the bank if they have no way of knowing which loans will get paid, and which borrowers are going to be unable to repay?”

Well, that’s where “bond insurance” comes in.

There are companies in the market (AMBAC and MBIA are the two largest players) who, for a fee, will “rate” the quality of the borrowers behind the CDO that our friendly bank is attempting to sell to an investor. Some CDOs are sent to market by banks who only lend to the most carefully-screened borrowers…and from those banks we see the “AAA” rated CDOs. Because the risk of them failing to pay is low, they pay lower interest rates (after all, risk equals reward…).

On the other hand, some of our friends and neighbors have those “adjustable-rate loans”, and there are questions as to whether they’ll be able to keep up the payments. These “subprime” borrowers (and, eventually, the CDOs their loans represent) are more risky…but they pay much higher interest rates, especially after their “teaser” rates expire—and that’s obviously more appealing to investors, if some way can be found to limit the risk.

A solution was found: AMBAC and MBIA would essentially “insure” the continued stream of income from these CDOs for a fee that would be based on the risk of repayment, as they saw it—which would theoretically make “subprime” CDOs just as safe for investors as “AAA” CDOs…only with much higher interest being paid by the borrowers to the “subprime” investors.

Low risk, big reward...it was financial genius.

And for three years or so, every time you flipped on the TV you saw ads for loans from the Countrywides and the Ditechs of the world. Washington Mutual became one of America’s largest lenders on the strength of this market.

Investors and lenders/servicers made billions in fees and interest payments with a steady stream of income ahead for as far as the eye could see—as long as the borrowers kept up the payments. Mortgage lending became a much bigger business than it had been the decade before…investing in real estate became the fast way to make a buck…and homebuilders went nutty building on any piece of land they could buy or borrow. Brokerage firms could afford to give their most valued staff the kind of bonuses that make $1000 suits too cheap to wear to work.

Condos in Florida became the investment everyone wanted to have.

But have you seen the Florida real estate market lately?

That rhetorical question is actually not a bad description of what’s happened to lots of those investors: a huge run of lending to pretty much anyone, lots of those folks can’t make their payments, and there’s so much surplus real estate out there that foreclosure isn’t resolving the investor’s problems (if you can’t sell the foreclosed property it becomes an expense as you pay some third party to maintain the place until you can…and try to imagine what happens if you own an entire condo building that’s sitting vacant—as lots of investors do).

To make matters worse, the current “glut” of real estate has depressed the value of homes and land across the country…meaning you might owe more on a property than it’s current value. (As an example, new condos in San Diego are worth much less than they were 18 months ago.)

If all that wasn’t enough, those who took out “Adjustable Rate Mortgages” (ARMs) over the past couple of years are now seeing their interest rates “adjust”—and guess what? When they adjust, the payments are not going down…they’re going up. Meaning more and more borrowers can’t pay on loans that are supposed to be long-term “safe” income streams.

Now here’s where it gets ugly for some of the players.

If you are a lender who has sold loans you become the “servicer” of those loans. That means you collect the money from the borrowers, and then pass that money to the investors…minus your fees for the service, of course. But you take a risk: as part of the “service”, if a borrower should fail to make payments, you are on the hook to keep sending money to the investor for that loan until it’s classified as “nonperforming”…which might take a few months. If many thousands-or millions-of borrowers are not paying their loans, you’ll be in big trouble—and that’s why Countrywide is in the process of being acquired by Bank of America.

Ditech is a part of the GMAC Finance operation, meaning GMAC has to cover those losses for them…and Washington Mutual, according to some observers, is today “circling the drain”; with Chase or Wells Fargo mentioned as potential acquirers.

But what if you’re one of those “insurers”? Once these loans go “nonperforming”, the potential exists for the investors who own literally trillions of dollars worth of loans to seek restitution for their lost streams of interest income—which will immediately bankrupt the insurers. If that occurs, this type of business, as we know it today, would presumably come to an end, as there would be no way to create the same low risk, high return environment investors found so attractive.

Presumably this would also remove millions of potential homeowners from the market, further lowering the demand for all that surplus real estate, and potentially bankrupting America’s homebuilders.

Of course, all these investors now have to begin the process of trying to figure out what they actually own…and how much less the true value of their investments are than what they wanted to believe. And since they are not yet sure which loans will fail…there’s no way to determine the true value of those investments. A classic Catch-22.

And that’s why you’re hearing unfamiliar terms on the news like “writeoff” and “mark to market” and “Sovereign Wealth Fund”. Investors are having to admit they have billions of dollars less in these investments than they originally thought (Citigroup has already written down over $20 billion); and some banks and brokers are being forced to turn to outside sources for capital just so they can stay in business.

It’s also part of the reason the dollar is less valuable in the eyes of the rest of the world…meaning everything we buy from another country with dollars is made more expensive—things like clothes, and cars, and HDTVs, and iPods…and oil.

That’s a reasonably good recap of what’s happened so far.

However, I also promised you a glimpse of the future.
So here we go.

Most of the borrowers who took out these ARMs will see a “reset” of their interest rates 24 months after taking out their loans…and if they can’t make the new payments, the problem will become quickly evident.

There have been far fewer loans of this type written the past 18 months, which means in about 6 months most players in the market will begin to actually know just how bad their problems really are.

There are efforts to create a “bailout” for the bond insurers; but the concept there seems to be either that the investors will cover their own losses; which, from my limited perspective, seems a pointless exercise—unless some new source of investment capital can be found; or alternatively, that this function be made into a “quasi-public” corporation, not unlike Fannie Mae is today in the mortgage market.

An additional “bailout” is being considered for borrowers. Such a plan might involve not raising interest rates for some period of time on perceived risky ARMs, in order to keep the borrowers in their homes. Others have proposed a moratorium on foreclosures—but that may just be delaying the problem, not a solution.

The bottom lines of both plans seem to be that investors are going to eat some losses, either in equity or income stream—or both…and unless some lenders and investors are exceptionally patient, large numbers of borrowers are likely to lose their homes, suggesting real estate valuations will remain depressed for a few years to come—particularly in places like Las Vegas, Phoenix, Southern California…and most especially Florida, where, for a while, the run of building was most amazing indeed.

There’s an additional element to all of this that is just now becoming known.

In addition to the investors I’ve previously mentioned, we are now discovering that lots of other institutions we would never associate with the financial sector have been dipping their toes into this water; and we are now being told that states and municipalities, colleges and corporations, and various entities of all sorts have been using these investments as a way to earn money from idle cash that would otherwise have been in a Treasury bond at 3% or so.

As a result, you can expect over the next few months to hear a thousand stories about the discovery that someone or another you hadn’t thought could have will have lost money in the “subprime” market.

Having said all that, I’m here to tell you that this element of the problem is likely less of a news event-even though the effects will be more widely spread-than the problems we already are aware of in the financial sector. Why? Because the financial sector player’s losses are deep (billions of dollars each for several of those players, presumably with new discoveries through at least midyear); while this newer group of losses will likely be “shallow”—that is, lots of involved entities each losing relatively small amounts...and relatively few of them in need of “cash infusions” or bailouts to remain in business.

And now it’s time to get to the big summation:

An investment vehicle known as a CDO (and others like it) allowed banks to “sell” mortgages and other debt to a whole new pool of investors…which created a whole new pool of home buyers…which created a building boom…which led to more borrowing to cash in on that new equity…which made a ton of money for a ton of people…until the party abruptly came to an end, taking a ton of people down with it.

As a result, the Dow Jones Average is up one day, down two, banks and brokers are sweating bullets, someone in Dubai will eventually own a Florida condo complex no one wants to buy at current prices, and as many as 2,000,000 families might lose their homes.

The extent of the problem is not yet fully known, but things will be clearer by midyear; and as bad as things are now, there’s a decent chance by year’s end we’ll be getting to the other side of a great big mess.

The unexpected bonus?
Now you’re ready to talk about this stuff as if it actually makes sense.

And who saw that coming?


let's hope this helps...

...clear a few things up.

"...i feel that if a person can't communicate, the very least he can do is to shut up." --tom lehrer, january 1965

Great work, Fake.

Very well and clearly presented.


...this is looking like one of those "need to know" topics...and it's nice to see the knowledge getting out.

"...i feel that if a person can't communicate, the very least he can do is to shut up." --tom lehrer, january 1965

Well said.

It's sad that our own government can't be honest about this situation. Check out how our Treasury Department tries to explain things:


Unfortunately, ignorance (or dishonesty) about the cause of this issue is rampant. Regardless of the cause, the implications are painful. Check out the most recent Statistical Release H.3 from the Federal Reserve, and look down the column labeled "Reserves of Depository Institutions, non-borrowed".

Note how the size of our banking system's non-borrowed reserves started declining at the end of last year, and that they are now *negative*. What are non-borrowed reserves, you ask? "Seasonally adjusted, break-adjusted nonborrowed reserves equal seasonally adjusted, break-adjusted total reserves less unadjusted total borrowings of depository institutions from the Federal Reserve."

What does that mean? It means that our banks have "borrowed" more money from the Federal Reserve than the total amount of their reserves, so they are effectively bankrupt except for the Federal Reserve's ability to print money to lend to our banks.

To my knowledge, our banking system has not had "negative non-borrowed reserves" since right before the Great Depression.

This is a good news and bad news situation. Good news is that we're not going to see another deflationary depression since the Federal Reserve will create the money out of thin air (through its euphemistically-named "Term Auction Facility") to keep the system running.

The bad news is that all this new money is going to cause (you guessed it) a lot of *inflation*. Apologies to the American worker, and American saver. This is going to hurt. Has your salary kept up with your food and gas bill over the past 8 years? Mine hasn't either. Yes, it will get worse.

We need a dose of fiscal sanity in Washington, and we need to get off this destructive treadmill caused by our monetary and banking system. Please vote for change in 2008!

William (B.J.) Lawson
Congressional Candidate, North Carolina's 4th District

William (B.J.) Lawson, M.D.
Congressional Candidate, North Carolina's 4th District


I thought all those tax cuts for wealthy individuals, corporations and capital gains were supposed to stimulate more than enough growth to offset the (cough) temporary (cough) tax revenue hit.

From all I can see, the gravy train of defense contracting has made too many Republicans way too much money for them to rein in spending. War without end = good business.

(You are definitely way too sane to be running as a Republican.)

for "trickle down" theory to work...

...the recipients of the tax benefits would have to use all that capital for "productive investment" that grows the american economy...but when you roll that tax cut money into another thousand shares of baidu, or purchase treasury debt, or buy a half-interest in a honduran sock factory...how does that grow the american economy?

adam smith never factored greed or foolishness or tendencies toward self-destruction into the "wealth of nations" thinking...and he should have.

"...i feel that if a person can't communicate, the very least he can do is to shut up." --tom lehrer, january 1965

Heck, yeah...

Why start a company, create a product, and create jobs? Been there, done that. IRS, SEC, SOX, EPA, OSHA (just a sampling at the federal level), state filings, sales and use taxes, local permits... and then you have to actually satisfy customers so they WANT to give you money!

And then when you EARN some money, you're paid in a paper currency that loses its purchasing power at over 10% per year for essentials like food and fuel. Yes, 10%. Check your grocery bill, and gas bill. Have your savings and salary kept up?

In that kind of environment, you can't just save, you HAVE to aggressively take risks to "beat inflation". Saving is PUNISHED, and debt is encouraged so you can pay back loans in "cheaper" dollars.

But guess what... do banks make more money from savers, or debtors?

You're right, the root cause is greed, foolishness, and the tendency towards self destruction... those very things are inherent in our banking and monetary system itself:


It's much easier to find a tax shelter, passive investment, or government contract through your favorite lobbyist. Or better yet, just get a license to print money:


When the "wealth of nations" is a pile of debt-based paper currency... well, that doesn't seem all that wealthy, does it? Who would want to work for that?

You know, back in the early 1900s, people actually debated these weighty issues in everyday conversation:


That was before Fox News, though. Wonder what happened?

William (B.J.) Lawson
Congressional Candidate, North Carolina's 4th District

William (B.J.) Lawson, M.D.
Congressional Candidate, North Carolina's 4th District

i'm not entirely certain...

...as to what happened to informed discourse, but i suspect the cost of 30-second sound bytes had something to do with it.

that seems to have demonstrated itself most recently to the disadvantage of the edwards candidacy; who had lots of ideas to discuss, but a fundametal inability to break the discussion down to commercial-length "bullet points"...and a lack of funding to drive the discussion into the brains of voters.

"gay marraige is bad" and "the other guy supports illegal immigration" and "$400 haircut" fit neatly into such a sound byte, and i suspect that's why those conversations dominate the format.

i will give the edwards campaign big "props", however, for creating the "two americas" brand and trying to focus an advertising discussion around that concept.

"branding" of goals and programmatic approaches to problems may turn out to be the wave of the future for political discourse--and for mccain, the need for his own brand to counter the "conservative" brand already cemented in the republican political consciousness is immediate and enormous.

but that might not be entirely bad--there is the potential to use "branding" commercials in mass media as vehicles to drive voters to a discussion and information oriented website (again, big props to edwards for making this happen first) where real information can be offered...and at lower cost than trying to move as much information simply through mass media.

"...i feel that if a person can't communicate, the very least he can do is to shut up." --tom lehrer, january 1965

for y'all...

...i would debate abandoning my "madden-eqse" perspective on travel and actually consider the airlines.

and that's saying something.

"...i feel that if a person can't communicate, the very least he can do is to shut up." --tom lehrer, january 1965

thanks for that

uhhh... compliment.

But seriously, I don't think either party has a monopoly on truth. At the national level, both parties are out of control and pushing big-government agendas driven by corporate interests.

At the state level, we have a legacy of corruption including our own "tools" Black & Decker (now ironically making license plates) and a magical disappearing highway trust fund.

At the local level... well, I could go on and on.

I think our nation would be better off if we would dismiss every single incumbent politician this year. Anglico, please join me and run for something. Anything. Take your principled indignation to Raleigh, Washington, or wherever-you-live and let's at least try to work for the people, instead of making the people work for us.

Your country needs you:


William (B.J.) Lawson
Congressional Candidate, North Carolina's 4th District

William (B.J.) Lawson, M.D.
Congressional Candidate, North Carolina's 4th District

I did my turn in the barrel

If you can believe this, I was the right-wing business guy on the Chapel Hill Town Council. After a two year term, I was turned out of office. Most people say it was because I voted for a large, dense development called Meadowmont.

I agree with you that neither party has a monopoly on truth. Indeed, I'm no big fan of much of what I see in the Democratic Party these days. But I have even less confidence in the Republican Party.

Imagine a person has been recruited for a CEO job where the description is: enable citizen advantage and further the common good. Then imagine the candidate's pitch is: I will make this organization smaller and less relevant, and sharply reduce the capital available for investments in the future.

I don't know about you, but there's no way I'd hire that person.

Depends on what organization, doesn't it?

The federal government neither enables citizen advantage nor furthers the common good.

The interest of our current federal government is indistinguishable from corporate interests. We desperately need to downsize DC.

Don't get me wrong, I'm not "anti government". I just think we need GOOD government, and government that is as local, and as accountable, as possible.

History proves that consolidated power in the hands of a few (i.e., oligarchy) is dangerous.

It's time to make the federal government smaller, less relevant, with less capital available for corporate welfare, endless wars, and foreign occupation. We need to repair our safety nets, infrastructure, borders, and national defense (as opposed to offense) here at home, and transition to a free-er society where we again learn that we can (and must) help *each other*, as well as ourselves through state and local initiatives.

Helping each other as free individuals through locally-managed initiatives (like Blue Ribbon Mentor Advocate) works. Our futile attempts to "outsource" charity and social services to an distant federal bureaucracy give us FEMA, acres of decaying trailers, and thousands of dollars of ice in storage.

Less money for FEMA = more money for state and local emergency response, private charities, and the Red Cross.

William (B.J.) Lawson
Congressional Candidate, North Carolina's 4th District

William (B.J.) Lawson, M.D.
Congressional Candidate, North Carolina's 4th District

This is a great program, BJ,

Helping each other as free individuals through locally-managed initiatives (like Blue Ribbon Mentor Advocate) works.

but it's an atypical example of what you're claiming could better serve all areas.

So how much federal money is required for BRMA? None. It receives no federal funding or grants. Two-thirds of its operating expenses are paid for by the school district, and private funds are raised every year for a variety of summer and after-school events, as well as college scholarships. Right now, 91 students in grades 4-12 enjoy a mentoring relationship, and 80 high school students are participating in a separate Youth Leadership Institute organized by BRMA.

Chapel Hill/Carrboro has around 3% unemployment rate, with a median income level much higher than most other N.C. cities. Additionally, property taxes are something like $1.81 per $1,000 value, which makes the school district one of the highest-funded in the state.

In the absence of State or Federal assistance, how well would this program do in poor counties? You can't have a bake sale every day...

State assistance

and local assistance are just fine. We should be making more decisions about what programs we choose to fund, and how we choose the fund them, at the STATE and LOCAL level.

Federal "assistance", however, is a bad deal. The federal government would never qualify as a legitimate charity based upon the fraction of receipts that make it to the desired recipients.

What happens when the benefits trough is in Washington? There is SO much money to be had, so much bureaucracy, and so little accountability, that the cost of providing benefits are huge. And the benefits themselves are dispersed in a highly politicized fashion.

We need to keep more money at the state and local level, so we can fund programs that take advantage of local resources, empower local leadership, and meet local needs.

Clearly that means we need principled leadership in every level of government. Ready to run for office?


William (B.J.) Lawson
Congressional Candidate, North Carolina's 4th District

William (B.J.) Lawson, M.D.
Congressional Candidate, North Carolina's 4th District

You can expect to see me running

Clearly that means we need principled leadership in every level of government. Ready to run for office?


for office some time in the near future, but I'm not sure if it will be alderman (first) before I set my sights on something higher. As you've probably figured out, I have a very high opinion of myself, but I'm just not sure if the voting public is capable of recognizing my value. :/

We need to keep more money at the state and local level, so we can fund programs that take advantage of local resources, empower local leadership, and meet local needs.

I don't disagree with this, BJ. But it's important to keep in mind that money corrupts at all levels, and many municipal governments in this country have served to keep wealth in the hands of a select few, equating to an almost neo-feudal system.

We do need responsible leadership at all levels of government, but we also need the checks and balances inherent in a tiered system (such as we have). And that, in my opinion, includes a relatively strong central government. Not necessarily the bureaucratic behemoth that we currently have, and God knows there are so many inefficiencies, redundancies and conflicting elements it would take another bureaucracy just to figure it all out. Or better leadership, as in a President who doesn't write himself and his million or so employees out of every law that is passed.

having a federal presence...

...in the form of fema, as opposed to many local "presences", is not unlike risk-pooling in the insurance industry.

a well-organized and operated fema can purchase and regionally prestage a variety of resources that would have to be duplicated 50 times if each state did the job itself.

heavy construction equipment, mobile hospitals, alternative communications networks, blue tarps...all of it can be purchased and dispatched on a larger scale more cheaply, with less duplication of effort by a federal player than 50 state players.

the question, in my mind, is not one of federal or state emphasis.

instead, the question is: how to we recreate a feeling that the federal government should exist as an organization that actually assists the public...as opposed to the recent (republican) treatment of government as an enemy that must be rendered irrelevant at all costs.

"...i feel that if a person can't communicate, the very least he can do is to shut up." --tom lehrer, january 1965

More than a feeling...

Sorry to cover a classic Boston tune, but the federal government's limited responsibilities to "assist the public" are actually pretty well defined in our Constitution. By and large the federal government should leave the public alone, although we've tended to ignore the 10th Amendment in recent history.

The "feeling" of a federal government that should "assist the public" can be deceiving -- when you have corporate interests looking to sell a billion dollars worth of tarps and mobile hospitals to FEMA, the interest is NOT in "assisting the public". It's selling a billion dollars worth of tarps and mobile hospitals.

How is a federal presence like risk pooling? It seems that you're suggesting federal government brings Wal-Mart-like economies of scale in purchasing, which is a different concept. Risk pooling != Wal-Mart.

I'd suggest that the benefits of Wal-Mart purchasing power are offset by the lack of local control and accountability. What to buy, and how to stage, are both nuanced questions that are better answered by local emergency management personnel than federal bureaucrats. We *need* good "local presences" for emergency management. People who live in a community are the ones who need to own these processes and resources.

Finally, since the federal government (unlike the states) can print its own money, there is no practical limit to its ability to spend, or the amount of inflation it can create as a result.

That's definitely not "assisting the public."

Finally, "government" is not an enemy. An overreaching central government is the enemy, and has been throughout history. We need good government that is as local, and accountable to its citizens, as possible.

William (B.J.) Lawson
Congressional Candidate, North Carolina's 4th District

William (B.J.) Lawson, M.D.
Congressional Candidate, North Carolina's 4th District

there is one potential saving grace here...

...which is related to the probable "over-marking-down" of the assets that banks have swapped to the fed.

in a different (improved) "mark to market" environment (as excess real estate draws down, for example...or as the full extent of the default problem becomes known) some portion of those assets will be swapped from the fed back to the banks, who will be able to "remark" the assets at higher values than they hold today, creating new capital in the process.

as that occurs, the percieved value of the "safer" swapped holdings should also decrease.

in that scenario it is possible to envision a "crossing point" where bank asset holdings again turn positive...and if i were less lazy i would have worked out how much appreciation/depreciation would be required for this to come to pass.

"...i feel that if a person can't communicate, the very least he can do is to shut up." --tom lehrer, january 1965

Crossing point

Care to speculate wildly as to when? Two years? Five years? Too early to tell since we don't really know the scope of the problem?

Take a guess.

That's an interesting hypothesis

But with respect to real estate, I don't think we're done yet. The market may be anticipating the worst, but with the combination of the mortgage insurers on the ropes and more rounds of resets yet to come over the next year, there is still more damage to be done.

The linchpin in the entire system is the job market. If folks keep working, they can make a mortgage payment (even a renegotiated one). But if folks lose their jobs... that's a problem. I think it's a bit too early to tell, and the job market will be interesting to watch.

The Fed can bail out the banks, and we can all pay the price through inflation and a weaker currency.

Truly bailing out the economy, however, requires more than just cheap money. It requires that we become a nation empowered to produce again, and create our own jobs. But those who would invest and create jobs need to be free to do so, as opposed to heading for greener pastures due to corporate welfare that protects job-exporting multinationals, a punitive tax code, and protectionist regulations.

It's time to embrace capitalism, and reject corporatism.

William (B.J.) Lawson
Congressional Candidate, North Carolina's 4th District

William (B.J.) Lawson, M.D.
Congressional Candidate, North Carolina's 4th District

You're right...

I should have said "as people have lost their jobs", and "as people lose their jobs". That is the unfortunate truth, especially outside the "bubble" of Research Triangle Park.

The optimist in me yearns for the day when folks whose corporate employer has outsourced, downsized, or offshored their employment will discover their passion in their own entrepreneurial endeavor.

A good friend of mine was pushing packets for AT&T a few years ago... that job was just a job, and not a very good one.

Fortunately, he and his wife discovered that their passion is making salsa. Frankly, it's the best salsa I've ever tasted. After three years of blood, sweat, and tears, they recently landed their first national distributor.

What they did in response to adversity is courageous, and difficult. What they did is true capitalism, as opposed to crony corporatism. And I honestly believe what they are doing is the best alternative for them, our community, and our country.

William (B.J.) Lawson
Congressional Candidate, North Carolina's 4th District

William (B.J.) Lawson, M.D.
Congressional Candidate, North Carolina's 4th District

for reasons discussed in this thread...

...particularly the high probability that more writedowns are coming for financial-sector players, i'm not yet sure when (or if) such a "crossing point" might occur...but i can tell you that this series of events did occur, to some degree, during the unwinding of the savings and loan crisis of the 80's.

the way to get to the answer would be to assess the decline in value of the swapped assets, then develop scenarios that assume how rapidly that value might recover.

at the same time, a model would have to be made of how rapidly the "safer" fed assets will decline on better econimic news.

moving on: i would also remind the group that not only the public's perception of their personal job security, but also the perception that the value of their homes is (or is not) declining will drive the willingness and ability to avoid default.

if your mortgage payments are resetting upward while the home's value is sharply declining this will also cause some homeowners to "give up the ship", suggesting the extent of the foreclosure problem cannot yet be fully known.

"...i feel that if a person can't communicate, the very least he can do is to shut up." --tom lehrer, january 1965