Fix the Home Glut

Many are decrying that the AIG (AIG - commentary - Cramer's Take) bailout now helps the holders of the collateralized debt obligations (CDOs) who bought insurance against them from AIG. The idea is simple: These CDOs are worth, in many cases, next to nothing depending upon the vintages, geographies and FICO scores, but they will now be paid back at pretty much face value -- AIG CEO Ed Liddy said the prices will be negotiated, but I don't see how they can get any less because AIG guaranteed it and the U.S. is not abrogating any of these guarantees.

It's an obvious windfall and still one more piece of the stinking puzzle that involves unwinding the bogus real estate finance that prevailed from 2004 to 2007.

The bigger issue, though, is whether the government will then take over MBIA (MBI - commentary - Cramer's Take) and Ambac (ABK - commentary - Cramer's Take) -- I know people at those companies say they don't need it, so OK, they don't ... but let's say they do for the purposes of reality -- and have them make good on all of the credit default swaps they wrote against bad CDOs.

If the government is willing, they can buy several trillion dollars of these easily through this method and then sit on them and hopefully they will come back to some value.

It's another way to solve the problem -- a more expensive way than just giving homeowners $50,000 apiece, even -- but it does make the banks whole.

Of course, it does nothing to solve the actual problem of foreclosures, because even if you own the CDO outright you can't open it up and renegotiate the loans. It is a true bailout for the CDO buyers -- hedge funds, pension funds, banks -- even though it does not address the root cause.

Nothing's easy with this stuff. There are a lot more insurance policies written on this stuff then there is stuff. It is not at all clear why you can legally pay off the policyholder with an economic interest and not pay off the policyholder who just bet against it because it was a piece of junk. They both will be paid. That would probably add at least another trillion dollars to this new bailout proposal.

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