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Taxpayers won’t get any meaningful return on their investment unless the proposed equity ride passes.

This is a good point. If this works…then I think we should all revisit the much ignorantly maligned concept of privatizing social security. The fact is, even with these shitty equities, the tax payers are getting a better deal than the social security trust currently gives them.

I see a watershed moment on the brink.

Good job with the basic premise here. I agree, we collectively HAVE to do something to get Wall St. out of the mess they’ve created with our Government’s easy credit line over the past years, going all the way back to Paul Volker and the Clinton admin.

A few problems with your analysis. First, we’re not throwing tax payer cash at the banks to fix this problem, as you suggested in the last paragraph. Banks aren’t having a cash flow problem, the Investment Banks are having a credit meltdown. A gross lack of liquidity in the market- the currency that banks lend to other banks and corporations borrow for investments – has frozen up due to the failures of some major Investment Houses and the worlds largest Insurance Co – AIG. When the lack of trust in our financial markets caused a ‘run’ on money market funds which scared the freakin pants off of the Fed and Treasury Depts. it became obvious to everyone that some BIG FIX needed to get done

The rest of your summary is good, except for the estimate of the initial cost of these Mortgage Back Securities that the Gov would pay. You said .40c on the dollar, I’ve heard as much as .65c which would mean, after the Fed issues bonds and the other costs of doing business, we may be lucky to earn anywhere from 8% to 15% on our ‘investment’ if all goes well. Good luck! And welcome to the Credit Swap Business, my friend.

Also, remember, that its not plain old vanilla mortgages that are on the chopping block, its mortgage-backed securities. Even if 80% of those mortgage holders can afford the home, their mortgages have been chopped up, repacked and sold off as financial instruments. The government is not simply buying up individual mortgages, they’re buying up mortgage-backed securities. Even if as little as 20% of the assets in the security are rotten, its not necessarily a strong security.

But ultimately I’m more interested in the wisdom of it. What precisely would such a bailout look like?

Here’s the thing. Real estate prices had been growing at unrealistic and unsustainable rates for some time, which is what led to the raft of bad risk loans. If you look at historical prices and project from those, disregarding the bubble growth, then you see that current valuations are in a far more sensible ballpark than the prices that existed when the bad loans were issued.

So, there are now lots of folks out there who took loans they couldn’t afford to buy houses at inflated prices. Picking a few numbers out of my rectum, let’s suppose your garden variety Joe Bad Timing has a mortgage of let’s say $320,000 on a house now valued at 210,000. In that instance, what’s a better bailout than declaring bankruptcy and walking away? Maybe you expand some asset protections, maybe not, I’m not sure what gets protected. I could, for example see protecting some or all of retirement assets if they aren’t protected.

But what’s the point of sustaining the situation where we’ve got a bunch of Joe Bad Timings who get to keep their houses as a giant financial burden? That hypothetical house is unlikely to see its $320,000 valuation again any time soon.

Ultimately, what makes sense is to walk away from what is now a terrible investment. Then, the best bailout going forward is to find a way to extend folks new post-bankruptcy credit to buy another house (or even the same one) at a sensible market rate. BUT, only if that person is genuinely credit-worthy according to some sensible standard when income is compared to expected expenses.

Home ownership is not a sacred civil right. It’s something to aspire to, but it’s not even a fantastic thing for everyone compared to renting. It depends on your circumstances and lifestyle and life plans and a variety of other variables. Speculation and greed are certainly a part of this story, but extending credit to bad risks is also a part of the story. When the dust settles, we need a situation where a chastened market looks serious askance at every prospective borrower.

I am seeing anecdotal stories in the news of folks with less income than I buying bigger nicer homes than I, much closer to downtown, and crying poor mouth that they’re getting foreclosed upon because they can’t afford their new monthly cost now that their 3-year ARM has expired. There are lots of folks like me who made a sound decision about where and what they could afford to buy based on their income and the prices when they bought. We all object to bailing out folks who MUST have known when they signed that they really didn’t have a plan for meeting the larger payment that might well come.

“We’re from the government. We’re here to help.”

There is absolutely zero evidence that the government is capable of doing this right, folks. We’re trying to save ourselves some (very real) pain, and by doing so we’re opening a fiscal Pandora’s Box. Pyrrhic victory, at best.