Wednesday, December 03, 2008

Will Anybody Actually Address the Problem?

It appears that while everyone has acknowledged that our problems began with the Real Estate meltdown, no one seems to be willing to actually deal with that meltdown. Program after program has been rolled out, but none of them are actually helpful - they just nibble around the program (the purveyors hope that announcing a program will make them look good and make the markets move, even if the program is just a waste).

Housing needs to be addressed and losses need to be taken by everyone involved. This means mainly the banks and the consumers, but perhaps the government (though not the McCain route). Until the vast majority of loans are renegotiated, there will still be problems.

For some reason the banks hold a lot of "toxic assets", helping the underlying collateral will help these toxic assets become less toxic, but getting them off the balance sheets will do more to help the banks move forward from this calamity. TARP was supposed to do this, but the idea was a failure from the beginning in terms of how it was supposed to be ran. For a few weeks I've been pondering how to get these assets off the balance sheets. The idea I came up with was to create a government pool that would accept the assets from the banks in exchange for some equity and future income rights, as well as some loan loss guarantees by both the bank and the government. This would effectively do what TARP was supposed to do, but without purchasing the assets outright. The pool would be run for the long run which would mean that "mark-to-market" rules would have no affect. This morning I was reading that this is in fact the approach that the Swiss took with UBS (or something like it).

The Treasury and Fed are walking some pretty fine lines right now, but they've got to do something about this toxic asset problem that starts with housing. The longer we delay, the more costly and harmful it will get. Just last week we found out that in addition to the 1/3 trillion of bad assets Citigroup has on its books, they have another 2/3 of a trillion of their books. We need a Toxic Asset Pool and housing to be addressed.

Scott Dauenhauer CFP, MSFP, AIF