Why is it that with all the money injected via various forms of bailouts banks are still in dire straits and mortgages and the consumer are still in as much trouble if not more than they have been since the beginning of the crisis?
Think of it like this, a loose analogy but it essentially encapsulates what has happened:
In the good times the banks wrote a huge number of puts (CDS/CDOs) for pennies because they thought the underlying stock (mortgages) would never go under the $100 strike price. They didn't have to put up any collateral to write these puts so it was easy and free money which is why they wrote so many of these puts. Reality hits and the stock falls to $80 (housing/mortgage defaults) meaning the banks are now on the hook for $20 per option that they sold for pennies, but they have no collateral and the options are getting called. Panic. In steps the government/tax payer and pays off the options allowing the bank to stay solvent, only just. The bad bets have been paid off but the stock is still at $80 and the homeowners/consumers are in the same dire straits that they were before, despite the huge payoffs to the big speculators, and the bank can't help by lending more because the bailout money didn't go to the bank it went to pay off the big speculator who bought the puts. In hindsight it would have been far cheaper and better for the taxpayer (not to mention the economy) to have supported the stock price and kept it above $100 until option expiration.
Think of it like this, a loose analogy but it essentially encapsulates what has happened:
In the good times the banks wrote a huge number of puts (CDS/CDOs) for pennies because they thought the underlying stock (mortgages) would never go under the $100 strike price. They didn't have to put up any collateral to write these puts so it was easy and free money which is why they wrote so many of these puts. Reality hits and the stock falls to $80 (housing/mortgage defaults) meaning the banks are now on the hook for $20 per option that they sold for pennies, but they have no collateral and the options are getting called. Panic. In steps the government/tax payer and pays off the options allowing the bank to stay solvent, only just. The bad bets have been paid off but the stock is still at $80 and the homeowners/consumers are in the same dire straits that they were before, despite the huge payoffs to the big speculators, and the bank can't help by lending more because the bailout money didn't go to the bank it went to pay off the big speculator who bought the puts. In hindsight it would have been far cheaper and better for the taxpayer (not to mention the economy) to have supported the stock price and kept it above $100 until option expiration.
