Stewart Gordon

An Immediate, Implementable Solution to Toxic Assets

Tallguy 511:



Superb summary, my response for clarification of your points:

1. We know some CDO packages were "salted" accidentally or otherwise, with
mortgages not of the value the package claimed to be.
2. We know some mortgages in the general group within a CDO are in default or have potential to default under today's circumstances at a rate probably higher than usual for that quality of instrument.

3. Within the huge inventory of these "so-called toxic assets" are conceivably even packages with normal default percentages.

Because no one knows what is in each specific package of umpteen mortgages (the undone inventory issue), Wall Street is pricing ALL such packages as if they were defective, and AS IF THEY WERE ALL BROUGHT TO MARKET NEAR SIMULTANEOUSLY.

The above considers in more detail your correct points #1 and #2.,

#3. Correct, but some of these aren't defaulting, they are slow, may need re-financing that many are capable of doing, but I absolutely believe a majority have some value. One must consider that, by the time a full default and auction occurs, there are some terribly low values to set against some dramatic legal costs, not to comment on usual property deterioration. A large number of the unfinanceable homes here will sit on the market until people aren't afraid to buy homes again. People won't buy homes until they can borrow; when they want to buy, there will not be adequate free capital in our banks if this is not fixed, now!! (Unless your dream is a government mortgage business run with taxpayer money.)

#4. Without dealing with specific markets, I don't agree with #4. I believe we have another 10% to go downward in housing prices (some think 15% but I think that has to be regional); in addition, when a market becomes commoditized as this one has, it will nearly always have a month where prices plunge beyond anything expected - and that is the month that sellers have capitulated in Wall Street terms and buyers are starting the process of buying us out of this hole,said purchases always being at unbelievable bargain prices.(that shocking fall,maybe of only a month, signals the market is on its way back.
HOWEVER, as I point out, doing this program, should prepare us for the torrent of bad mortgages coming out in the mix of packages in late June/July and should mean we are more experienced, have a market for the CDO or equivalent instruments starting if not fully active and banks are better prepared to handle these people and their homes.

5. Establishing a proxy value is essential; Wall Street will persist to eternity pricing for the disaster described in #3 above so their one-day tsunami price is useless; by spreading out the entry of these packages into settlement, sale or whatever,( without rendering a huge number of banks insolvent while requiring them to deal with their individual caches of these "mixed barrel of apples") is essential.
IMPORTANT DISTINCTION: What you call resetting the value vs Mark to Market is not quite what I suggested. What I am suggesting is the Titanium Team resetting the values uniformly to a percentage of the FACE VALUE of the individual packages and removing those resets 10-20% a year. Remember, that value could be above what some banks have written these down to, thus giving them a reserve against which to write down other bad assets that are cluttering their required capital holdings.

6. YOU NAILED THE ESSENCE OF WHAT MAKES THIS FIX A PROBLEM THAT SEEMS TO REMAIN INTRACTABLE. YOU SAID - "WITHOUT A PROXY PRICE, ALL OTHER EFFORT IS NOISE!!" AMEN!!

In interest of full disclosure, there is one exception to all: the government could spend 1 - 2 Trillion dollars of taxpayer money buying us out of these and thereby giving us the privilege of lots of taxes in the future and lots of inflation to eat away the lower take-home experienced in all economic levels.
Thank you for reading and understanding. Growin$$



On Mar 09 09:20 AM Tallguy511 wrote:

> I agree with the approach, however to get your highly thought out
> and detailed points clearly understood a closing summary of main
> points is needed addressing why this directly impacts root cause.
> Your underlying theory, I think, is:
> 1. Defaulting mortgages are undermining value of much larger population
> of mortgages.
> 2. Many or maybe all mortgage bundling instruments are being undervalued
> due to uncertainty.
> 3. Even defaulting mortgages have significant value depending on
> asset involved. For instance a defaulting house mortgage is not worth
> $0, it at least have the value of the house involved.
> 4. The swing in current value in a low housing sales market is an
> overcorrection on the downward side.
> 5. Resetting the value of these vs Mark to Market is essential to
> stabalize the financial markets.
> 6. All the other effort is noise if this basis is not reestablished.
>
>
> Is this correct?