On the Urgency of Restructuring Bank and Mortgage Debt, and of Abandoning Toxic Asset Purchases

Hussman Funds Market Comment ^ | 30 March 2009 | John P. Hussman

[batter]

***The following are excerpts. It is far better to read the entire commentary (long but good). The graph is scary - it will make sense if you read the whole commentary .***

Last week, the U.S. Treasury Secretary advanced two proposals; one was a call for regulatory reform that is absolutely essential to the resolution of the current financial crisis. The other was a recipe for the insolvency of the FDIC, which would squander public funds to subsidize private speculation in troubled mortgage securities.

[snip]

Indeed, the only way for the toxic asset sale to increase shareholder equity is if the buyer overpays for the asset...the Geithner plan creates a speculative incentive for private investors...taxpayers would absorb all losses in excess of 3-7% of the purchase amount. This is essentially a recipe for the insolvency of the Federal Deposit Insurance Corporation itself, which would provide the bulk of the “6-to-1 leverage.” To the extent that it is not acceptable for the FDIC to fail, the Geithner plan implies an end-run around Congress, and would ultimately force the provision of funds to cover probable losses.

...All the transaction accomplishes is to take the assets out of the bank's hands, to offer half of any speculative gains to private “investors,” and to leave the public at risk for 93-97% of the probable losses. What the plan emphatically does not do is to affect the payment obligations of homeowners in a way that would reduce the likelihood of foreclosure...

[snip]

From the beginning of the recent crisis...I have emphasized that nearly all of the financial institutions at risk of insolvency have enough liabilities to their own bondholders to fully absorb all probable losses without any loss to customers or the American public...

[snip]

[batter]

Alternate title: How Obama and Congress are having fun wasting your money.

[DannyTN]

I liked the original idea last fall of holding auctions where banks would submit bids on how little they will take for their loans. In effect it causes the worst of the worst to be sold to the government at a market rate, not face values at the minimum price the bank is willing to accept to get it off of their books.

The gov’t would then owned the mortgages, could restructure at will, and if they either received payments or foreclosed on the properties the tax payers would stand to profit on any amounts gained above what was paid the banks.

[mojito]

The FDIC is going to be insolvent in a year under this plan.