It is estimated that there will be more than 6 million foreclosures in the next few years.

I want to make one thing perfectly clear from the outset: the bailout plan as originally proposed by Secretary Paulson was not to help homeowners who were in danger of losing their homes in the subprime mortgage crisis. The Paulson bailout was aimed at rescuing the Wall Street institutions that hold the mortgage derivates.

Paulson (and now much of the Congress) want to do this because derivatives were purchased as assets to increase the banks' liquidity, but with the value of the derivatives now BELIEVED to be unknown, the banks cannot use these as collateral. Thus, the credit markets are freezing up.

And what is a derivative? Once upon a time when I was young, a bank made a mortgage and "owned" the house, receiving a monthly stream of payments. The more mortgages it made, the more income, the more it could turn around and use the money to lend out again.

However, to reduce the risk of bad mortgages, clever investment bankers bought from banks good, so-so, and poor mortgages, packaged them in units with maybe 1000 good, 1000 so-so and 100 poor mortgages, and offered this package for sale. Sometimes, this package was sliced into manageable dollar amounts, but was still comprised of good, so-so, and poor.

For all the hype, Wall Street is always not moved by technical analysis or deep knowledge. Instead, the market is moved by naked emotion, by the herd instinct. Witness the wild swings this last week as Wall Street reacted to each rumor about the progress of the bailout and the Dow went up and down 100s of points. 99% of the individual Dow stocks have nothing to do with the derivative crisis.

Six weeks ago, Wall Street decided these derivatives were worth little. Economists had known that the number of poor or bad mortgages were growing, but NOBODY had or still has knowledge of the true value of the derivatives. Wall Street's emotional opinion and the subsequent naked short selling caused the downfall of AIG (which guaranteed the value of these derivates).

Paulson is not trying to help Joe and Mary whose ARM is resetting and whose mortgage payment will go up by $1,000s. Instead, he wants to buy these derivatives, which he calls "toxic," so banks can have more money to lend to business, for car loans, for more mortgages, etc.

We have been side tracked by Paulson from the debate that went on last year in Congress about relief for home owners like Joe (freezing their ARM payments for 2 years, etc). That legislation would have made the derivatives whole again.

Finally, Paulson's, and now Congress' plan to purchase the derivates begs the question: what will the banks sell the derivatives for? If the banks sell the derivatives to the government at fire sale prices, the liquidity returning to the bank will be little. If the government pays the bank close to the original price of the derivative and makes the bank almost whole, the government will NEVER make any money when it resells these sliced and diced securities.

My suggestion to solve this crisis is two pronged and will appear on Tuesday..

Peter B. Hayward

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