Stewart Gordon

The Timeless Money Center/Government Dance

WHY DOESN'T THE US GOV'T BUY 10 YEAR PREFERRED AT 7% ISSUED BY THE BANKS SPECIFICALLY FOR THIS PURPOSE, OFFERED TO ANY BANK WRITING DOWN THEIR CDO'S TO SAY, 15%,WITH SAID PREFERREDS NOT TO EXCEED 75-85% OF WRITE-DOWNS. THESE BANKS WOULD HAVE TO ALSO AGREE TO PHASE IN THEIR RESETS OVER 3 YEARS, AND PERHAPS CONVERT THE MORTGAGE OF THOSE HOPELESS CASES, FIRST TO A 30 YEAR STRAIGHT LINE MONTHLY AMORTIZATION OF LOAN PRINCIPAL, THEN IF THIS DOESN'T WORK THEY CAN FORECLOSE, IF IT DOES WORK,THIS WILL CONVERT TO RENTAL OVER SAY FIVE YEARS BEGINNING ONE YEAR AFTER THE ORIGINAL RE-SET DATE.
LET'S LOOK AT THE RESULT. BANK LIQUIDITY PROBLEMS REDUCED, STOCK MARKET AND OTHER INVESTOR RISK AND DISCOUNTING SUBSTANTIALLY REDUCED BY FORCING THE WRITEDOWN INSTEAD OF PLAYING THIS "HOW LONG CAN I FAKE OUT THE MARKET" NONSENSE GOING ON TODAY. THE US BALANCE OF PAYMENTS WOULD NOT BE AFFECTED, INTEREST ON THE PREFERREDS COULD GO TO THE TREASURE OR 50% TO A FOCUSSED ISSUE, THE IMPACT OF THE RESET PEAK WHICH I BELIEVE OCCURS IN 2009 WILL BE SPREAD, SINCE ANYONE NOT ABLE TO REFI OR TO PAY THE MORTGAGE AS WRITTEN WILL HAVE SOMETHING ON THEIR CREDIT RECORD THEY WILL NOT BE LEFT OFF SCOTT FREE. THE WORK-OUTS WILL BE LEFT IN THE HANDS OF THOSE WHO MIGHT WELL WANT TO GET RID OF THOSE PREFERREDS (MANY THEY SHOULD ESCALATE 1/2% A YEAR AS ADDED INCENTIVE), THE GOVERNMENT WOULD HAVE ITS MESSY INCOMPETENT INVOLVEMENT MINIMIZED. SOME TERMS WILL UNDOUBTEDLY REQUIRE RESTRICTIONS ON LAWSUITS; HOWEVER, THE US WOULD NOT BE IN THE POSITION OF RETROACTIVELY REWORDING FINANCIAL DOCUMENTS.

The numbers used are approximate, but I thought would be good enough for illustration. The definition of the scope and depth of the problem, the means of action available to mortgagors and mortgagees and a more generous time frame would remove further uncertainty, use of our US government money at a rate would be less damaging to the US$
and balance of payments, the markets
could then focus on the issues brought about by a weakening economy and consumer credit - I have no interest in destroying the real world, just taking the mumbo-jumbo out of the CDO and so-called sub-prime problem.