First, I sure didn't mean to say there wasn't an issue with working class people getting the shaft, far from it. I was pretty explicit in pointing out, I think, that the more vulnerable among us not only are getting the shaft now, but have been getting it for a couple of decades. It isn't until now that the media, and therefore your average American bidochon, is starting to be conscious of the phenomenon and this only because wealthier people are starting to have to pay the piper. When it was just the poor getting fucked, like five or ten years ago, no one gave a shit. Now that Ward and June Cleaver are feeling the heat, it's another story.

More specifically, I would point out that the simple way the issue is framed speaks to just how fucked up the political discourse in America really is, and how utterly top-weighted (ie, like a Democratic bailout of Citi now that Rubin is at the helm)  all possibly apparent policy prescriptions are likely to be because of this framing.

For instance, Jerome is speaking about second mortgages and securitizations thereof, which are in all likelihood more unsecured than secured as a practical matter. Now, the back story to this is that the reason many people go into second mortages with loan to val figures approaching 100% is because they got into serious financial distress.

The top reasons for this distress are medical expenses, job loss or a spousal (usually a husband) abandonment. These three factors represent more than 3/4 of all bankruptcies in the US until bankruptcy "reform," medical expenses more than half to it alone. Does the foreclosure crisis start people to talk about proper healthcare reform, unemployment insurance, income support for working poor single parents or childcare? I think you know the answer to this, which goes straight to the heart of the framing of the issue.

But back to the history here. Enter bankruptcy reform. The Democrats got together with the Republicans to make it harder for folks to discharge debt. Again, no counterparty, no healthcare reform with equitable, bankruptcy-free access to health services, no real unemployment insurance, no family or child or housing allocations, no substantive access to affordable or state-provided childcare for single mothers. Democrats don't do those things anymore, Republicans (mostly) never did. What you do get is just good-old fashioned debtor's prison style legistlation, bipartisan over here.

So what's a middle-class person, down on their luck and on the way down the SES ladder. to do? Liar loans, 100% loan to val loans, get the cash to pay the doctor for the last round of chemo so you can get the next one.  So I'm not convinced we're really looking at a massive increase in defaults driven by disadvantaged folks, and I'm guessing we're looking more at the formerly middle-classed no longer having the bankruptcy option, which while sad and in dire need of remedying, is sort of ironic, since the two parties they overwhelmingly vote for got together and made this all possible for them. So they voted overwhelmingly for "more and better" Democrats to get things fixed, and we'll all be damned if not a god-damned substantive thing has even come close to being even started as regards nearly every aspect of the problems I have just enumerated. With the execption of healthcare for children, no progress, not even a start, and certainly no linkages.

Second, the pratical. I'm not so sure everyone is convinced these instruments are worthless. I recall doing ABS consulting work 6-7 years back, some asset-backed securities that were having very similar issues as what many MBS issues are having now, doing it for the manufactured-housing equivalent of Countrywide, Conseco Finance, who couldn't sell their paper anymore due to both prepay and default issues, some existing tranches trading at 20 cents on the dollar, then not trading at all, company stuck with paper it couldn't sell anymore and running out of cash, accounting irregularities, SEC investigations, the whole nine lot.

Were the assets worthless? Warren Buffett didn't think so, nor Lehman Bros., nor GE Capital who eventually bought up all the paper and the servicing rights.

Beyond that, I think Linca covered the valuation issue.I would only add that a 2 trillion dollar problem  would represent fully 20% of the entire value of all mortages in the US, the majority of which are standard fare, 15- to 30-year fixed affairs with very low default rates. This is not to say the value-at-risk couldn't get that high, but if it did, we're talking a cascade of events, probably involving a severe, '30's style contraction, not out of the question but not in my book likely until these fools have invaded a few more countries. But by then, we'll have more to worry about than whether Ward and June Cleaver were able to hang on to their house.

 

Fai de bèn a Bertrand, te lou rendra en cagant