Chris Whalen, The Institutional Risk Analyst, is making more sense on a rational way of resolving the subprime mortgage crisis than Tim Geithner, Ben Bernanke, and Larry Summers rolled together.
This is a bit of a read. We're looking for a video of his interviews on Bloomberg the past few days, and today in particular. But his common sense approach makes more sense than anything we have heard from the Washington Whiz Kids.
On top of his recommendation, Obama needs to target the stimulus more precisely and concentrate on driving employment and the median wage in the short term with both money and policy changes.
In fact, it is from the policy changes that the greatest gains would be achieved. Obama and crew need to stop putting out fires ad hoc in the manner of Bush and start working on a serious and well thought plan that the market can understand, whether they may like it or not.
Much of the stimulus package looks like payoffs to constituents and special interests, a perennial problem in the Federal government. The Democrats have to stop playing 'Let's Make a Deal' and strike a vision, share it, and then go for it. That is what FDR did in his first hundred days. His crew made errors in implementation, but the vision was coherent.
Obama needs to find his footing and start thinking out of the box. And it is not likely he will obtain that from Geithner or Summers, and does not have time to wait for the Volcker Committee to weigh in with a compromised solution.
Its a tough spot for any manager. Crisis management shows the weakness of his managerial experience. Bush was dying on the vine on his own watch. It tests a person like nothing else.
Its also an opportunity for growth, and Obama has about three months of goodwill capital to spend, and some bright people on deck. Time to stop making deals, and listening to the vested interests of everyone, and get to work striking a vision that his team can implement towards. A good start would be to strike the note of reform and level with the people, and do something about it other than symbolic gestures and fine rhetoric. Its time to tell the truth.
Can We Fix the Banks, Help Homeowners, and Rebuild the Mortgage Markets? Can Do.
"Here's the basic approach:
* The US Treasury would tender for all of the private label CDO/MBS extending between a range of dates, say 2004 forward to year-end 2007, representing trillions of dollars in assets held by investors and banks globally. The pricing on this paper will reflect current market prices, but say the average price was 50% of face value. Only issues that actually have an enforceable legal claim to collateral will be eligible. Derivative structures without collateral will not be eligible.
* Treasury then transfers all of the purchased toxic paper to the FDIC Deposit Insurance Fund, which acting as receiver under 12 USC restructures the trusts that are the legal issuers of the bonds and recovers legal ownership of the underlying collateral. The FDIC arguably has the power to call in all bonds and related investment contracts, and extinguish the claims of those parties which do not respond to the Treasury tender. The legal finality of an FDIC-managed receivership under 12 USC is what is required to end the toxic asset issue once and for all. The bankruptcy courts could be used in a similar fashion, but the unique legal authority of the FDIC suggests to us that this agency should run the process as part of its larger asset sale operations.
* This now "clean" whole loan collateral will then be re-sold to solvent banks in the localities where the property is located, using zip codes and other means to identify eligible buyers, priced at say 90 cents on the dollar, with a full recourse guarantee from the FDIC and financing from the Federal Reserve Bank in the relevant district. The banks will initially be guaranteed a minimum net interest margin and servicing income, and immediately begin to service the loan and manage the credit locally. Indeed, the participating bank must agree to retain and service the loan so long as government financing is used. The bank has the option to repay the financing from Treasury and take full, non-recourse possession of the loan.
We don't pretend that this simple outline is sufficient treatment of this proposal, but we have heard several permutations of this approach from veteran bankers in the loan origination channel all over the US. We see several advantages to this "community bank" approach to the crisis, which might be combined with modest additional capital infusions to solvent community and regional banks like WABC, if they even need it.
* First, it puts the trillions of dollars in now illiquid mortgage loan collateral trapped inside thousands of securitization deals back into strong local hands, who are responsible and incentivized to both manage and service the loan.
* Second, it re-liquefies the balance sheets of the US banking industry and it will vastly improve the prospects for home owners and housing markets around the country. If we are going to further lever the balance sheets of the Treasury and Fed, let's do it for a real reason and with a clear purpose.
* Third, the approach outlined above provides the Obama Administration and the US Treasury with maximum bang for the buck in terms of both addressing the solvency problems facing the banks and also helping the economy and the housing industry.
One downside: This new market paradigm suggests that loan servicing as a standalone business may be at risk. Once community banks begin to accumulate significant local servicing portfolios, they may rediscover the benefits of keeping the credits that they originate. Sorry Wilbur!
And what about valuation? Well, as our friend Kyle Bass of Hayman Capital likes to remind us, all of these assets are valued and traded every day. It's just a matter of organizing the purchase process in a transparent and competent fashion. Starting with our friends at shops like Hayman, Black Rock and RW Pressprich, we know people who know how to trade illiquid assets."
