Calling their Bluff-- "Mark to MarkeR"

http://www.freerepublic.com/perl/pings ^ | October 2, 2008 | DoorGunner

[DoorGunner]

A Modest Proposal – for a “NO cost” bailout:

ASSUMPTIONS: This proposal is based on the assumption that the following accurately describe the problem we are trying to solve:

1. That banks (some “commercial” banks, and most “investment” banks) are failing and/or will be unable to make loans due to large holdings of “toxic” debt instruments.

2. That these “toxic” instruments are unsaleable because they include, in various proportions, Sub-prime mortgages.,

3. Because these instruments are not pure bundles of mortgages, but instead are Derivatives of such mortgage “bundles,” it is difficult, if not impossible, to accurately determine whether the underlying mortgages are Prime or Sub prime, Performing or Nonperforming.

4. Since these instruments (at Investment Banks) must be “Marked to Market,” and there IS no “market,” they are deemed to have NO value.

[Since the above is based on listening to talk radio, and NOT on Internet research, it MAY not be accurate. Further, we are probably NOT being given the whole story.]

Commercial banks are required to maintain “reserves” of some percentage of the total amount they are allowed to lend. Presumably, investment banks (at least, while acting like commercial banks) have some similar requirements. In the recent past, these reserves were deposited with the Federal reserve, in the form of Treasury Bills, Notes, or Bonds.

Since the Treasury does not have a surplus of $700 Billion, it will have to sell Bills or Bonds.

Such a sale (especially when the value of the dollar is falling, and our economy is ,or appears to be, in crisis) may well require a high interest rate, and may well not be saleable at all. Further, injecting a fresh $700 Billion (or more) into the economy will almost certainly have an inflationary effect.

I believe that there are better ways to deal with this “crisis.”

1. Since the proposed purchases (of toxic mortgages and their derivatives) is intended to provide liquidity by meeting reserve requirements, and that those reserves will probably be in the form of treasury debt, we could skip a lot of risky intermediate steps. Simply issue T bills, or Bonds of the amount decided upon for each purchase. These should be:

2. Non-negotiable (could not ordinarily be transferred) and Non-interest bearing. It would be ridiculous for us to pay interest, to banks who we just rescued.

3. They should be redeemable ONLY for repurchase of the toxic paper they sold, after a suitable period of time, so that the derivatives could be re-married to their specific underlying mortgages.

4. Then, those mortgages could be sorted as to Performing, Non-performing, and Foreclosed, and valued accordingly. Non-performing (or troubled) mortgages MIGHT be re-negotiated (as to interest rate) if they were of the bizarre kind (Negative amortization, “teaser” Adjustable rate) and the borrower had sufficient capacity to pay the new loan, and if he had NOT engaged in fraud. An ordinary, fixed rate loan should not be re-negotiated, if the buyer just wants out because the price he could get for the house has become lower than his original purchase price.

5. The above “sorting out” will probably show patterns of deliberate fraud, by mortgage makers, and by those who have generated Tertiary derivatives (not merely mortgage backed bonds, but dividing those into “tranches” such as “interest-payments only,” “principal only,” or “risk only.”) If memory serves, it was the invention[ex nihilo] of these “Tranches” by Lehman Brothers which was a major reason for the Savings and Loan crisis. They MUST be prohibited. And current issues folded back into the original mortgages.

6. It would be desperately unwise for the Government to attempt to artificially maintain the present (or recent) highest prices of houses. What we have been experiencing is a Bubble. The current (recent) PRICES are many times what the practical, functional VALUE of the houses involved. A major causative factor in this particular Bubble has been the completely idiotic practices of Fannie Mae and Freddy Mac, which effectively injected huge amounts of money into an already overheated market. (Thank you, Barney Frank, Chris Dodd, etc.) Every bubble HAS to break, sometime. [Anyone want to pay $1000 for a tulip bulb, or some South Sea Island stock?] This one has started to burst, and there is no point in trying to hold it together with string and chewing gum.

The banks may not like it, if they are expecting to get billions, to use as they will. This idea will make them continue to lend, if they want to survive. Foreign Central Banks should be happier with these “markers” than they would be if we had to default on every instrument they hold.

[DoorGunner]

Since I am not presently connected to the net, I may not be able to respond to comments, or questions. If anyone sees merit in the above ideas, please e mail to others, especially if someone knows a US Representative. Maybe we can save U.S. from a $700 Billion mistake. DG p.s. I just walked into my bank (a small branch of Wells Fargo) and asked if they were able to make loans. They said yes, they had plenty of money.

[griffin]

“They said yes, they had plenty of money”

No way....don’t they know we’re doomed!?