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User Info	What am I missing about ABX ?; entered at 2007-12-02 05:34:15
Gigi Posts: 563 Registered: 2007-08-26	Yal, Lets say someone was willing to give a loan to J6P at a teaser of 5% rising to 9% after two years. Consider that in the mad subprime lending frenzy, risks were being ignored. In a normal risk environment, J6P would never get the loan or would get it at 15%. What is the value of a loan paying 5% when investors really want 15% risk adjusted? Also note that in Paulson's scheme lender will be locked into this loan and will not be able to claim default and try to salvage whatever he can by foreclosing and dumping the rapidly depreciating underlying asset. I would guess that these two factors combined would make even first loans worth south of 50c on the dollar, possibly as low as 30c on the dollar. This will cause an instantaneous implosion of the SIVs with these loans. Another effect of the government mandating a freeze is that the risk premium on mortagaes in the US will shoot up. Lenders will want compensation for the normal credit risk as well as the risk that the US government will come in and lock them into losing loans when it wants. This has the potential to destroy lending for a long time which in turn will kill the credit based economy. As a corollary, house prices will crash and burn. This in turn will make any "locked" loans worth even less. I agree with others who have metioned that this reeks of desperation worse than the MLEC idea. If the is the best Paulson can come up with, the situation is nothing short of dire. 2007-12-02 05:34:15