Abe Mishima

The Fed Cannot Resolve a Solvency Crisis

Liquidity, insolvency? It's all tied together. Banks are having this problem because there is so little liquidity in a CDO portfolio, that they have to grovel to sell them at 20 to 30 cents on the dollar. Even if 95% of the portfolio is non-delinquent. And why do they have to sell at these ridiculous prices? To meet solvency requirements. I think the regulators have to give the banks a break for the moment. As long as the cash flow is there, waive the asset valuation requirement. Back during the Chrysler bailout, the government guaranteed their loans. The government can do something similar here. Instead of 20 cents on the dollar, the government backs the CDO to 50 cents on the dollar. I know, I know, you ask. How does the government get back its money when a bank must liquidate a CDO? Appoint a government agency to service the various mortgages, that's how. This agency will sell back the mortgages to the financial sector when times are better. The homes that must be foreclosed can be sold to charitable organizations at 60 cents on the dollar. Do gooders can fix the properties and resell them.