A Bailout at Market Prices

Disaggregate the toxic mortgage backed securities and all their derivative products.

 

Pass a law which would un-bundle these packages of bonds down to their constituent mortgages, then distribute the underlying mortgages to the current owners of these products on a pro-rated basis using estimates of the value of their current holdings.

 

All current holders of these products --a specified list of troubled bonds compiled by Treasury -- would be given 48 hours 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 (DoT). 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.

 

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 underlying a specific bond tranche is the value of that bond tranche and all its derivatives.

 

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 high-risk "equity slices," for instance, should get the stuff now in foreclosure.

 

As for the most exotic products, something which is "difficult to value," and "illiquid" is essentially worthless. Those who produce and buy this garbage should deal with the consequences of their own actions.

 

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

 

Re-do corporate books with these new values. Then, Paulson 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.

 

Buy no toxic assets!!

 

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. 

 

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

 

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

Comments

[BAD:]

You are exactly right on target with your assessment. I wonder how Paulson ever came up with $7B. Was that a "pull it out of the air" number. It would have been really nice to see true DOT numbers, using available software as you pointed out. I'd like to have seen all the "Illiquid" stuff, especially who owns it. Please publish those numbers if you ever get access to them.

vr, BAD

2008 Oct 02 09:40 AM

[helplessobs...:]

In time these deeds of trust will surface as local people step up and buy the sick houses in their neighborhood, fix them up and either sell or rent them. In addition to all the principles of real estate investments ignored by the capital markets, real estate is still LOCAL, LOCAL.

2008 Oct 02 02:06 PM