Wanted: Price Transparency in the Splurge

I got caught up last night and this morning on the splurge legislation. My favorite summary was from Henry on Clusterstock.  In that post, Henry wrote:

The Treasury has complete discretion over the prices it pays for crap assets (the most important provision in the whole document as far as the taxpayers are concerned). "The Secretary make such purchases at the lowest price that the Secretary determines to be consistent with the purposes of this Act." Translation: If the banks persuade me they won't sell for anything less than a sweetheart price, I can give them that price. The only good news: The Treasury has to publicly detail the prices it pays. So if the Treasury is paying grossly inflated prices, the taxpayer has a chance of finding out about it.

I was very happy to see that part about public disclosure. The pricing of the splurge transactions is what many of the smarter people I know have been focusing on. Paulson was very careful in his testimony to be vague about this very point. They want the flexibility to pay what they need to pay for these "crap assets" as Henry calls them.

One person's crap asset is another person's bargain. And I believe that, like with the RTC, many investors will make a killing buying these crap assets. This was my favorite comment in the entire discussion of the splurge on this blog last Friday (and what a great discussion it was/is). In that comment, JLM says:

Sometimes a bit of historic perspective is useful in trying to deal with TODAY. Remember that quote about being doomed to relive the history we ignore? Well we are not being very thoughtful about this. We have actually seen this movie before though maybe it was a shorter version.

Remember the S & L crisis and the Resolution Trust Corp? I do because I hit a very, very good lick in purchasing distressed properties from the RTC, pension funds, insurance companies, banks and S & Ls. I bought them for $0.20-0.30 on the dollar of replacement cost, fixed them up, owned them for about 5-7 years, had the numbers audited annually and sold them all to institutions in 3 transactions in 1995 --- 6,000 apartments, 100 warehouses, 7.5 MM sf of offices.

My partners were the likes of GE Capital (for whom I also fixed up some of their problems), Fidelity and private foreign investors. BTW, GE Capital is the smartest bunch of real estate folks I ever met and the best risk takers a partner could ever have hoped for. And they made a ton of money in the deal while conducting themselves like perfect partners and gentlemen. Private money jumped in big time!

I've heard that the hedge funds who made the most money on the "short subprime trade" have largely unwound that trade and are starting to nibble at the very mortgages they bet against a couple years ago. That's a good sign and this splurge is going to allow them to do more than nibble shortly.

So, here's the point I want to make. I would like the splurge legislation to require that we not only have public disclosure, but that we have in effect a real time listing (like the Nasdaq) of all splurge related transactions. This is good for the public (so we know what's going on with our money) and it's good for the Treasury (so it is forced to behave rationally) and it's good for investors who want to profit from all of this splurge activity. It will also allow us, after the whole things is over, to analyze the splurge and learn from it, like JLM learned from the RTC.

Comments

[Per:]

Absolutely. Create transparency by establishing an open market for these assets instead of having Washington officials determine the price. We are a market economy after all.

I think they fear we are seeing from Wall Street and Washington is that this could be the beginning of a very strong wealth distribution from the old guard to the new guard. They all know that eventually these assets would appreciate in value and would therefore like to avoid selling them at the bottom...

2008 Sep 30 01:18 PM

[Jan VanDenBerg:]

Disaggregate the MBSs and all their derivitive products.

It is the packaging -- the bundling and slicing -- which is ruining the value of a good asset. Most US mortgages are sound.

Pass a law which would unbundle these packages of bonds down to their constituent mortgages, then distribute the underlying mortgages to the current owners of these products on a prorata basis using guesses at the value of their current holdings based on these wacky models.

All current holders of these products -- a specified list of troubled bonds compiled by Treasury -- would be given a week to report exactly what they have to Treasury, so the ownership of everything would be of record.

The underlying mortgages are easily valued using standard software for calculating the discounted present value of a Deed of Trust. Missed payments take a specified nick from the value of the DoT. Mortgages near or in foreclosure can be valued at the independently appraised value of the underlying real estate. (Hire 3 local real estate appraisers, get three values and average them. Duh.)

Even the sickest real estate in the sickest parts of California and Florida is selling to vultures. It has a price.

The total of the discounted present value of the constituent mortgages and foreclosed-on real estate underpinning a given bond tranche is the value of that bond tranche and all its derivitives.

The underlying mortgages in each bond should be ranked by quality (determined by payment history) and distributed to the holders of the various "slices" of the bundle based on the risk level of the crap they bought.

The bozos who bought "equity slices," for instance, should get the stuff now in foreclosure.

As for the most exotic products, something which cannot be valued is essentially worthless and should be treated accordingly. Those who produce and buy this garbage should deal with the consequences of their own actions.

Unbundling would release significant increases in value, possibly enough to re-capitalize most holders of the products.

Those who end up with the mortgages in foreclosure should simply foreclose and market the underlying real estate as soon as possible.

Re-do corporate books with these new values. THEN, Paulsen can use taxpayer money to buy newly-issued stock in those banks which are still short of capital and too big to fail, at current stock prices (without releasing the results of the revaluation). Taxpayers would almost certainly make money over 5 years.

Remember, the point of this exercise is to preserve the flow of loans to Main Street. Investment banks and hedge funds don't make loans, so let them fail.

Even at 8% unemployment, something like 95% of US mortgage payments will continue to be made. The vast majority of US mortgages are still solid.

The problem is the way Wall Street has bundled the bonds and then sliced up the bundles to make these toxic products.

The individual Deeds of Trust or Mortgages inside these ugly wraps are going to continue to produce payment income in the vast majority of cases, even in a depression.

You're getting your monthly payment. You will continue to. Your rate of return is competitive with any other investment. There is no problem with this asset.

It is the packaging, slapped on by Wall Street, which is destroying the value of these DoTs.

Wall Street has created a mess, building something they don't understand and which doesn't work.

Looking forward, let's not package mortgages. They are too diverse and need closer management.

Jan VanDenBerg

2008 Sep 30 02:01 PM