Non-business press readers are probably asking themselves whether they should be worried about the ongoing crises in the housing and financial markets.

The answer is: Yes, more than you think.

The talk these days is of a financial superfund, a plan backed by the Treasury Department that would enlist major banks to contribute $80 billion or more to buy good securities from investment vehicles that invested unwisely in subprime and other debt.

The major dailies are doing well on this story, especially on Tuesday, making clear that the fund, known as the Master Liquidity Enhancement Conduit (pronounced “EmLickEyCon” around The Audit) will not be used to buy bad or subprime loans from the hedge funds that bought them. Rather it would buy only good-quality instruments. What’s the point?

Floyd Norris of The New York Times explains that defaults on overrated bonds, and the uncertainty of the credit quality of everything else, scared the market away from buying anything. So, he writes,

The conduit could work brilliantly if it turns out that the collapse in the market value of the securities represents market panic rather than an accurate assessment of the likelihood of eventual default. If this is the case, then prices will eventually return to normal and this new creation will have bought time for that to happen.

If it’s not the case, and the collapsing prices reflect real collapsing values, then the problem is deeper than we thought and the new entity will not help, Norris explains, with this helpful quote:

“I don’t really see that this is going to make a significant difference,” said Jan Hatzius, chief United States economist at Goldman Sachs. “It seems a little more like a P.R. move, frankly.”

Remember, the problem here, as the papers explain, is that banks did a poor job of underwriting the loans (or in some untold number of cases, foisted them on unqualified borrowers using high-pressure sales tactics), then packaged and sold them to investment funds, which did an equally poor job of examining what they were buying.

For some plain talk, tune into an excellent video interview with Dick Bove, of the New York investment bank Punk, Ziegel & Co. on The Wall Street Journal’s website.

I like Bove’s incredulous tone:

The problem on the banking industry’s part is that they may not have underwritten them that well. The problem on the investors’ part is that they didn’t look at what they bought. (Smile). In other words, if it was twenty years ago, and someone wants to buy $100 million worth of mortgages, they would go through mortgage by mortgage and they would eliminate those mortgages that were questionable in nature. This time, the buyers… simply went in and bought them. They didn’t look at what they they bought. They didn’t underwrite what they bought. They just bought them.

Here’s an old investor talking: They just bought them! And now they want help! Forget it, Bove says, basically.

He also colorfully rejects the idea that banks should be made to buy back bad loans: “On a scale of one to ten, if we have a dumb meter, this is about an eight-and-a-half.”

But he makes the case that the fact that Treasury is involved at all here is not a good sign:

What it’s telling the market; there’s a real problem out here. There’s a problem of sizable magnitude. Because I cannot remember, going back at least the forty years that I’ve been doing this, that the Treasury Department has ever gotten involved ever in anything of this nature.

So, if you’re keeping score, that’s two evers and one anything of this nature. Yikes.

What’s the takeaway?

What the Treasury Department is signaling, in my view, is that you better be afraid because there’s a big problem and we can’t figure out how to solve that problem. But we’re working on it.

Announcer Kelsey Hubbard: “OK, well, thank you so much for joining me.”
Bove: “Thank you.”

The Audit: No, thank you. (Note to self: Sell everything. Today.)

The Journal also provides a useful interactive scorecard to keep track of the worst actors in the subprime debacle (and other companies affected by it) and the effect their substandard underwriting is having on earnings, reputations, etc. The interactive chart allows readers to rank the companies by name, date of announcement of the bad news. I would have liked to be able to rank the companies by size of the problem, but you can’t have everything.

The Financial Times wonders intelligently in an editorial, as do others, whether Treasury should be involved at all. Here some useful context is provided:

That question is made more acute by the fact that both Hank Paulson, the Treasury secretary, and Robert Steel, the under-secretary for domestic finance, are alumni of Goldman Sachs. Goldman does not particularly stand to benefit if the plan works - that dubious honour is Citigroup’s - but it is intended to help out Wall Street.

Provided the plan works, the Treasury’s involvement is justified. Governments can legitimately co-ordinate a private sector response when it would be hard for banks to act alone. As long as investors are not being cajoled to buy assets at unrealistic prices, and the Treasury offers no guarantees, Mr Paulson is within his rights to act.

That does not mean the plan itself is sound. Even some of the banks involved wonder whether Citigroup, which could contribute a quarter of the assets in the new fund, is being bailed out of its lending errors with a murky form of innovative off-balance sheet financing. That question applies to every bank that will kick in assets.

Readers wanting to know exactly how much exposure Citigroup has need only read this WSJ story, complete with excellent chart, showing that of the top ten biggest problem funds, known as Structured Investment Vehicles, Citi sponsored four, holding nearly $70 billion in debt.

(Citi is here found skulking yet around a financial disaster area. Where have I seen this picture? Was it Main Street? Wall Street? Japan? Clinton, Mississippi? What does take to get off Fortune’s the most-admired list, anyway?)

Anyway, the papers the last two days have been full of good information, even if it is troubling. Here are two bits more of sobering news. First, the Times reports that even Fed Chairman Ben Bernanke doesn’t know the value of the securities owned by these SIVs (pronounced “sieves”).

“I’d like to know what those damn things are worth,” Mr. Bernanke said in response to a question after his speech. Until investors “are confident in their evaluations,” he added, “they are not going to be willing to fund these vehicles.”

Finally, readers would be cheating only themselves if they failed click here for a look at a Times story and graphic. The story outlines the result of a study by Friedman, Billings, Ramsey, an investment bank based in Arlington, Virginia, that shows that many more bad loans were made and made much later than earlier believed.

The report’s author, Michael D. Youngblood, a portfolio manager and analyst at Friedman, Billings, Ramsey, said that most mortgage companies and banks had not tightened lending standards for borrowers with weak, or subprime, credit until July or August, even though early this year regulators, analysts and mortgage investors knew that the easy lending policies of 2005 and 2006 were producing high default rates.

“There are $10.6 trillion of mortgage loans outstanding in the U.S., and even if the brakes had been slammed, it was going to take a long time to slow this locomotive down,” said Mr. Youngblood, who has researched home lending for more than 20 years.

The accompanying graphic is a must. It shows that fully 16% of adjustable rate mortgages in 2005 and 12% made last year are already in default.

So, we have no idea how many ARMS made two, three and four years ago are going to go bad, but we know how many already are from 2005 and 2006. Anything above double digits is a very high number.

And it’s getting worse:


Borrowers who took out loans in the first six months of 2007 are falling behind on payments faster than homeowners who took out loans last year.

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Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.