Stewart Gordon

An Immediate, Implementable Solution to Toxic Assets

After reading the my responses to "retired engineer" if you would be patient and kind enough to scroll back up this column to the response that begins, "continued response from Author"
In that extended section, I tried to respond to the relevant comments from Prudent Man CFA,
waveheatin, Responsiblity, and nmelendez.

I then responded individually to john s gordon and tall guy 511, both of value with the tall guy 511 adding value to my initial article.

I am trying to get this idea into hands of someone who can do something with it. I will continue to respond as long as there are comments, questions, alternate ideas.
By now, you must know I believe blame and vengeance have no place in healing this ghastly mess, so I will not re-state that.

Again, thank you all who responded.
Growin$$

An Immediate, Implementable Solution to Toxic Assets

I guess I feel there is too much vengeance in the comments below. Let's let them hang by their necks for three years,and since by then they are dead, use taxpayer $$$ - one to two trillion - to put the core of the financial system back together.

As a businessman, it is my instinct, faced with very, very troubled assets and businesses to seek value first and having done that, allow failure second. I also loath having government (our money) in such an inevitably destructive course of action.



On Mar 08 12:07 PM retiredengineer wrote:

> The problem is the government buerocrats have invented the word "too
> big to fail". Definition, appointed buerocrats to lazy and/or inept
> to take the time to correct the problem. Don't play the stock market
> and lose 10's of billions of dollars of taxpayer money. Force each
> bank asking for a bail out to sell all divisions except the toxic
> assets. Suspend all bonuses, dividends, bond payments until you know
> if you have any money to pay them. The people causing the problem
> then have the money from the sold divisions to see if they have enough
> to pay of equity holders. Allow one to three years and if in the
> end you are negative the government has insured this so picks up
> the bill, but all other divisions are doing business and you are
> not rewarding the crooks and causing a long line of beggers asking
> for our tax dollars.

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?

An Immediate, Implementable Solution to Toxic Assets

jACK - I believe that the pressure of having to have adequate assets to lose 10% or 20% of their guarantee each year will mean they write their own business plans or die.
This plan gives them no money - it says here's some guarantees that are adequate for you to heal yourselves so you can start lending again. They are lending today, they will need to lend more, but that won't occur until this bottleneck in our financial system is eliminated.
When the apple barrels are investigated so they can sell them - to whomever - then the new owners will have the responsibility of handling the mortgages. The banks, once incentivized (gun to head), should find lots of mortgages they don't want to sell, they do want to finance and at least part of what I sense is your objective will be met. Governments and politicians think laws run businesses; I can assure you that businesses that are going to run and survive will do so despite and not because of government laws and meddling. If they don't, they won't have customers and if they don't use this opportunity to get customers, they will go broke on their own.


On Mar 09 08:10 AM john s. gordon wrote:

> an interesting suggestion.
>
> in 2008 it was friends of hank getting bailouts w/o any business
> plan,
>
> in 2009 it is ?

An Immediate, Implementable Solution to Toxic Assets

Continued response from Author - tried to identify the writer whose suggest I found not to be a plan at all - rather it wasw destroy everything, soak the taxpayer and in three years make it go away. Without pretending I could imagine what this did to the financial markets, as a businessman, I must seek value first, a solution first and let someone else worry about vengeance. This suggestion approached anarchy.

4. I might agree with one writer's comment on bigness, but I don't have time to philosophize. I do think there is great irony, if not justice, in forcing those who bought this paper and loans - in ignorance, due to poor due diligence, I don't care, forcing them to work them out on an "or else" basis - and all they get is a shrinking guarantee.

I'm very loathe to have that super competent Sheila Bain stuck with the huge banks - who could have been tasked to solve their own problems or go broke - at the expense of her efforts to do the optimum for and with the Regional and smaller banks.

5. My research and questioning says there are still significant CDO problems out there. However, I used CDO as stalking horse for all those batches of lousy assets whether they be commercial loans, or other assets in an alphabet soup I soon found irrelevent. Perhaps the next paragraph is more important.,

It is important to realize that the second peak of mortgage problems (people coming off low/no interest mortages packaged into these CDO or such instruments)is about the same size as the first one, occurs THIS YEAR, about June/July. (see Economist,Oct. 10,2007).Further reading and discussion strongly suggests a high number of ALT-A and equally super-toxic mortgage disasters litter this peak.

If we adopt the plan I am suggesting, we will find that markets will develop for CDOs, commercial mortgage packages, even Jumbos and Helocs where appropriate; the banks will get experience, we will get slowly developing markets, all will get experience doing/trading instead of hand-wringing,and the banks will be staffed up for the next on-slaught. I will leave all comments about how to value to the titanium three - remember, that doesn't mean anything without the declining guarantees!

For those who may not realize it, these are debt instruments containing 500, 1000, I've forgotten how many mortgages/individual debtors. Some of them need and deserve help, some of them don't need any help, and some shouldn't get help at all.By using guarantees for this program of dealing with the INSTRUMENTS, we may well be freeing up what some think could be over a trillion dollars, some of which could be used for those individuals above,.
However, banks are doing something today, contrary to some of the self-serving comments I read in blogs and hear from politicians. With this program, it is realistic to assume banks will now work harder on these assets valuation and disposal (or holds)now that it is safe to do so - and in the process many of them will expand the breadth and shorten the time of implementation of current programs. Instead of cursing the banks, give them means to solve the debt instrument problem, without tax payer money,and let government get involved as need classes appear. Frankly, I believe the federal government is not capable of doing more than funding state efforts to solve helping on a more local level.

Finally, in the last comment, the seventh I believe, I find absolutely no solution. Mark to model only worked when the assets were what they said they were; some of the results of this effort I outlined could re-create assets that could use mark-to-model. The last commentor may have a brilliant investment tactic (I reserve my opinion), but I'd suggest he or she use their own money instead of taxpayer money to buy the time to achieve their coup.

Thank you all for your responses. My future responses will not address the vengeance issues, the blame issues. They are counter-productive until the problem is solved.

Stewart Gordon (sorry for the break in the middle of this,.)

Wall Street Breakfast: Must-Know News

This column cites housing inventories -I think they are understated. Do you know what sales rate is being used in the divisor??

The Federal Reserve, the Economy, and Stocks

Until someone tells me how the CDO issue (the trigger of this,if you please) is resolved, not by the Fed,or the Fed Gov't., or by any magic wand, rather by a step-by-step exposition of the REAL steps it will take to unwind a mortgage default on 123 Main St. USA that sits in the CDO portfolio of a cash-squeezed financial institution at 789 never-never land, Wall St. USA or a bankrupt bank/financial institution at ein-zwei-drei Das-Strasse, EU, I will have a hard time agreeing with anyone's forecast or crystal ball. Absolutely no one has yet dealt with that hard, fundamental issue - the core issue recognized implicitly last August. Write-offs, insurance company bail-outs are tangential problems whose solution or partial solution doesn't truly solve the core cause.
The detailed exposition of a solution that will be implemented, however painful or onerous its impacts, will be the first step in a long road to establishing the accepted valuations whose current absence is destroying peoples' ability to trust anyone who is called "financial" or borrower. The inability or failure to see how to do this rather specific act is assiduously sabotaging all the other efforts, to date, because none of the the so-called incremental solutions deal with the fundamental issue of unwinding the originating trade.
Since all of the above analyses, up-down-and sideways, goldilocks & apocalypse, fail to provide this, I do not believe they can be tested for validity as they have not illustrated a process on which their or anyone's potentially positive vision must be based. Growin$$