Readers suggested a topic on bail-out details. "Perhaps we can talk a bit about the practicalities of a bailout. I work for a big company involved in the MBS business. How can current subprime loans be 'restructured' in any way when they are owned by MBS investors who purchased these securities assuming the loans will perform as originated?"

"In other words, they paid for loans with certain payment characteristics, any restructuring will certainly make them less valuable as the interest rates will be less than planned."

"Almost all mortgage loans are part of an MBS transaction. The originator certainly has no right to restructure them (I’m thinking of WaMu’s recently announced $2BN plan)."

"If there is some kind of forced restructuring the MBS market will totally collapse. I work closely with most of the MBS underwriters on Wall Street, there are a lot of very unhappy people here right now. We can enjoy their discomfort (and frankly, I often do) but the MBS holders will be the losers in the end, and that is all of us one way or another."

A reply, "I’m not sure this could work at all, but it could work like this. All the investors in all the tranches with their varying interests (good luck) would have to agree to swap some of the their bonds (matching the non-performing part of the portfolio) for new ones in one of two pools, the workout pool and the foreclosure pool."

"To be eligible for a workout, a FB would have to be a legitimate purchaser who could have afforded their home at pre-bubble prices, but overpaid due to the frenzy, or someone who bought earlier but fell behind to due temporary hardship. They would get a 30 year fixed self-amortizing loan at current interest rates, but with the principal written down so the payment would be more than is traditional but not oppressive (say 38% not 30%)."

"And they would have to agree not to take on any more debts. Those investors who choose the workout option would take the loss on the write down up front."

"Those investors who choose the foreclosure option would get the results of foreclosure proceeds."

"Here is the problem. Once you have a workout options, what about the family eating Ramen noodles every night and paying 50% of their income to meet the higher payment? Once a workout at 38% is available, and if they were underwater, they would have every reason to default unless they had extensive other assets."

"And it is possible that if not every investor chooses the 'workout' option the borrowers in each issue who would be eligible for a workout could be limited. In that case, it would be first come first serve, and everyone would have reason to rush into default before the only option left is foreclosure."

"So the only think I can think of that works only works if a minority (the sharpest operators and most selfish people, most likely) figure out what to do."

One saw immediate problems, "Any bail out will kill credibility for decades. If the governing 'elite' wants to try this option, they will have to take that as a consequence."

One said, "Interesting, but substituting loans in the existing MBS pools would not work, it would fundamentally change the cashflow structure of the transaction."

"Your idea does make me think though that it might work for CDO’s that have MBS in them since they are not designed to be static pools. Still, even in that case the MBS themselves would need to be reconstituted so you are back to square one. I can’t think of a single incidence in the past 15 years (as long as I’ve been in this business) where investors have got together to agree an MBS pool restructuring, just too cumbersome of an exercise."

"I’m really interested to see how this bailout idea can possibly work given the existence of the MBS business. However, one thing I am sure about, it’s going to be a great time to be a securities lawyer!!"

Another saw irony, "It would be an amazing validation of the Law of Unintended Consequences if the MBS business by its very structure prevented bailout ideas from working."

Another points to a bagholder, "The i-banks and anyone who originated these will have to come up with any shortfall from their pockets."

A reply, "Like New Century? I don’t think they have the capital or the profits once this gets rolling. And the only way it doesn’t roll all the way down the hill is having a large share of Americans live in near poverty to keep paying their debts, which any workout would work against. They’d run like lemmings into default just as they ran like lemmings into debt peonage, if that’s what the people down the street are doing and what shows up on Oprah."

The original poster said, "No, the originators or IB’s have no contractual obligation to make up any shortfall to MBS holders so why would they. These entities are taken out by the MBS trust, they no longer own the loans - a true sale to the trust has taken place."

And one saw a governmental role, "I am guessing the subprime bailout will come in the form of some kind of taxpayer-provided insurance. This is a good way to get taxpayers to assume the costs, as few taxpayers understand that loading up the balance sheet of explicitly-guaranteed government agencies like the FHA or implicitly-guaranteed (too-big-to-fail) government sponsored enterprises like Fannie Mae or Freddie Mac with toxic mortgage debt is a form of taxation."

"However, one would have to pay premiums to a private insurer to assume the risk. In lieue of premiums, the cost assumes the form of a time bomb that will go off at some indeterminate point in the future when one of these debt-burdened agencies blows up and taxpayers are billed for the cleanup costs."

The San Francisco Chronicle. "Dumb: Buying a house you can't afford with no down payment and a loan whose monthly payments will explode in a few years. Dumber: Lending money to people who can't afford a traditional mortgage, especially when they have lousy credit ratings and don't substantiate their income."

"Dumbest: Bailing out dumb and dumber, especially with taxpayer money."

"Keeping people in homes they had no business buying is wrong in many ways. For starters, there's no easy way to bail out homeowners without bailing out the lenders and investors who were largely responsible for the subprime mess."

"Many experts say we are in the early innings of the foreclosure cycle. If we bail out people today, will we be willing and able to help people who fail later in the game?"

"Propping up borrowers who took a gamble on a house and lost reinforces gambling. 'If people think they can take out a bad mortgage and they get bailed out, that's called moral hazard in social insurance and it's a very bad thing,' says Thomas Davidoff, an assistant professor in the Haas Real Estate Group at UC Berkeley."

"For California, 'we have proposed a $1 billion loss mitigation fund,' says Bob Gnaizda, general counsel for an advocacy group. And who should finance this fund? 'It's up to a combination of the investment bankers and the banking industry and the state government if necessary to provide the funding or the guarantees of the funding,' Gnaizda says."

"'We've asked (state Treasurer) Bill Lockyer to use his persuasive power to convince the six to eight largest investment banks, all of (which) do business with the state, that they have a stake in California's growth and economy. Since they helped finance the subprime fiasco,' he says, they ought to help solve it."

"What governments can do is prevent another subprime disaster by enforcing good underwriting guidelines and requiring clear, plain-English disclosures of the risks of exotic mortgages. What's more, society could stop demonizing renters."

"With or without bailouts, the subprime crisis is going to hurt many people. But it could have a silver lining. If it brings down home prices, more families could afford homes with realistic mortgages. And if it reminds everyone that buying a home is a risky proposition, so much the better."