that these mortgage backed securities are worthless, is idiotic.
No one is saying that these mortgages (or houses) are worth zero - you are absolutely correct. But that's not the point, they don't have to be worth zero. If they are worth merely 80% of their face value then they are worth negative $Billions! To the Investment banks that own these mortgage backed securities (MBS), not only are they worthless to them, but they contain severe negative value. Why? Because in order to buy them, these investment banks didn't simply used funds they possesed. They lent more money than they possess - in some cases 40x more money than they posses! This point is critical to understanding the crisis. It's perfectly legal under our Fractional Reserve banking system.
For example if you have $1 Billion you can lend $1 Billion in MBS and make 4% return on it. However, if you lend an extra $19 Billion you can finance $20 Billion in MBS and instead make 80% on you original funds (minus the cost of borrowing). But here is the key point... this system works fine unless the value of your collatoral (assets) drops. If you are lending at 20:1 then those assets cannot drop more than 1/20 or you are flat busted! A lot of people aren't aware that this is what has gone on. It's a gigantic financial catastrophe. It is also, coincidentally, what cause the Great Depression.
Here is an example from SeekingAlpha.com:
"Lehman's (LEH) market cap of $9B is only 40% of their book value of $23B, and it sounds very cheap. But then look at their assets: They have $160B hard-to-value Level 2 assets and $41B impossible-to-value Level 3 assets. The WSJ article applies a 5% haircut on Level 2 and 25% on Level 3 to come up with $19B future write-offs. However, based on analysis from many other public sources, most of the Level 3 assets are MBS CDOs, even if they are AAA rated, the recovery rate is only about 50%. For Level 2 assets, 10% haircut is actually a conservative estimate. The combination of both more realistic haircuts will result in $36B additional losses, which would more than wipe out their book value of $23B plus their market cap of $9B. This is leverage in the working, unfortunately at the down side. "See Article
See also this brief explanation of how Investment Banks use leverage
So these banks cannot stand on their own two feet. They are INSOLVANT and they want to hide the fact it from their investors, Financial regulators and the public. Their only hope of staying in business is if the value of the assets securing their MBS (or derivatives thereof) will rebound to their former levels and in the mean time they do not have to practice fair accounting. Real Estate will NOT rebound back to it's bubble days. The bubble has bust. Their next option is a government bailout which to date has meant wiping out all the shareholders. What we're witnessing are last gasps of desperations by financial entities that do not want to admit that they are busted. If they hide the true value of their books from their investors then the investors won't pull the plug. They have everything to lose by fair accounting.
The reason there is no market for these products is PRECISELY because there is no transparant accounting. Would you buy a financial instrument such as a MBS or a derivative of an MBS if you were not allowed to see the true value of the assets contained within them? HELL NO! The banks have themselves in a big pickle. The issue is not "liquidity", it's insolvancy. Many of them are walking deadmen.
What needs to happen is these firms need to go bust. Credit that has fueled the boom needs to be purged from the system. Firms that did not partake in this risky behavior will be rewarded by being the "last man standing". Investors who took these stupid greedy risks need to be wiped out. Investment banks who hid these problems on their books need to go bust and their reputations become just like Enron. A new generation will understand the lesson of risk, credit and leverage that was last learned during the great depression. This remedy is in fact unavoidable. There is no way to prevent credit from contracting despite the Feds fevorish actions. We can only make things worse.
"Blaming fair-market accounting for the credit crisis is a lot like going to a doctor for a diagnosis and then blaming him for telling you that you are sick"-Dane Mott , JPMorgan Chase & Co.