Reply #22: The bonds were originally valued based on the likely revenue [View All]

[karynnj]

stream from all the mortgages - and that stream did reflect the likelihood of the interest rates increasing over time. This was the market's view of the future earning stream of those mortgages.
If the failing mortgages could be converted they would be worth more than zero, but less than anticipated. It would be less than the value based on the higher rates, but more than the rate with them failing. Stockholders are NOT guaranteed that the value of their stock won't decline. (All stocks are in reality based on market expectation of the company's future earnings. Many very reputable companies had stock that imploded as they failed.)

I agree that there are two programs here - to deal with the failed mortgages and to restore the health of the banks, who were too heavily invested in the mortgage based stocks. These are not completely independent however - and what we do on the mortgage side, in addition to the economy improving, that will cause the "bad" assets to appreciate from where they are now.

As you say, the bonds need to be valued. That is really the heart of ANY process taken to fix this. What that article showed though was the HUGE range of possible values to assign. Classic economics would go with market value (38 cents) while the banks will want close to the value they have on their books (97 cents). I think this is where the real battle will be fought. The closer to 97 cents, the more investors regain their money - the closer to 38 cents, the less the deal ultimately costs the government.