Concerns about the proposed economic bailout

[0:00] ..." This is happening solely in the WBZ newsroom a local business analyst says he thinks the proposed 700 billion dollar bailout of the financial industry. It's a terrible idea because it fails to address what got us here. Business lecturer Peter Cohen at Babson College says the industry must change the way it gets compensated."...

[0:58] ..." money would talk to a mortgage broker who would then find a mortgage company. The mortgage company would sell that loan to an investment bank that would packages with a thousand other loans and then. The -- package called the mortgage -- security -- collateralized debt -- Which they would then -- sale to institutional investors all around the world and nobody can understand what was inside -- packages. It was sort of like -- Superman -- can't -- package -- wrapped -- in this -- the -- was a triple -- ratings -- mean Moody's -- rating agency -- competing with other rating -- to offer the highest AAA -- from. The investment banks for the investment banks. So which ended up with here is a false sense of security. And now what's going on it is somewhat something like"...

[3:50] ..." the problem what we want to do is put capital into the bank directly what the what the treasury plan is proposing to do. If you 700 billion dollars to buy these complex securities. Out"...

[5:12] ..." system. So why not go out and buy. The equity directly. And nationalize the banks. And then what will happen is that bank shall have the capital they need and and we won't have to go through this reverse auction process switches. Frankly going to"...

[0:00]" This is happening solely in the WBZ newsroom a local business analyst says he thinks the proposed 700 billion dollar bailout of the financial industry. It's a terrible idea because it fails to address what got us here. Business lecturer Peter Cohen at Babson College says the industry must change the way it gets compensated."

[0:19]" Well there's something very unique about the situation and what boiled down to is. From the cult securitization which is very ugly word it's difficult to explain that it basically you can think of it as in the traditional. -- of a mortgage. People would take had a mortgage on their house. They would -- talk to a banker and the banker would collect their -- trouble. They would go to the bankers in the governing the trouble can restructure this thing and maybe they would work something out but what's happened here is a very different kind of thing -- were securitization comes into play and what happened is that. Do you have a traditional mortgage you'd probably be. Person borrowing the money would talk to a mortgage broker who would then find a mortgage company. The mortgage company would sell that loan to an investment bank that would packages with a thousand other loans and then. The -- package called the mortgage -- security -- collateralized debt -- Which they would then -- sale to institutional investors all around the world and nobody can understand what was inside -- packages. It was sort of like -- Superman -- can't -- package -- wrapped -- in this -- the -- was a triple -- ratings -- mean Moody's -- rating agency -- competing with other rating -- to offer the highest AAA -- from. The investment banks for the investment banks. So which ended up with here is a false sense of security. And now what's going on it is somewhat something like thirteen trillion dollars. -- to these complex security that there. And nobody knows what they're worth and the latest information suggests that they are worth somewhere around twenty cents on the dollar. So there's a massive amount of losses there these very complicated securities. That nobody can understand and there's nowhere near enough capital to back them up to something like 340 billion dollars of capital against thirteen trillion dollars worth of these complicated securities in the 6% decline. Basically wiped out on the capital."

[3:38]" Well actually I think the plan -- it is terrible idea and I don't mean to be mean to anybody but the fact of the matter is that the basic problem here. Is the lack of capital. So we really want to solve the problem what we want to do is put capital into the bank directly what the what the treasury plan is proposing to do. If you 700 billion dollars to buy these complex securities. Out of the hands of these financial institutions and get into it to buy to sell them in what's called they're calling -- reverse auction. Which means that they are competing to see who will sell those. Those that toxic pieces of toxic waste for the lowest price. That they can't. So think about this way let's say they have hundred million dollars in mortgage backed securities on their books that. For booked it sixty cents on the dollar because there are taken right. And let's say they now RS to compete head to sell that to the treasury exchange for cash for the lowest possible price and lets say. They win the auction and they -- for thirty cents on the dollar. Now they've got a thirty cent a lot that they have to recognize. On their on their books which means that there capital gets reduced by that amount which means they have to go out and raise that capital on or two. Conformed to the we can statutory capital guidelines would basically means. That they're stuck if they go to the treasury deal because it's going to cut them to write down the value. Of their of their assets in taking hit and -- and be forced to raise capital but they can't get it. So really they're better off than even participating in -- With the real problem is is the need to get capital into the banking system. So why not go out and buy. The equity directly. And nationalize the banks. And then what will happen is that bank shall have the capital they need and and we won't have to go through this reverse auction process switches. Frankly going to be very confusing and difficult to pull out."