Barron’s posted an excellent article this weekend on why the wall street bailout is a good thing (subscription may be required) for the government and taxpayers. Why? The markets & public have assumed that the mortgage-backed securities the government will purchase are far worse than they actually are. In fact, most are senior “tranches” of loan portfolios (higher quality & lower risk), which means less senior slices will absorb any losses first. Even assuming very high rates of default and low foreclosure recovery rates for these loan portfolios, the government could very possibly enjoy a 7-8% return on their investment!
Further, the bailout will help free up capital in the credit markets, boost prices of mortgage-backed securities to a level reflecting reality, and (most importantly) stop the continued decline in housing prices.
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