Monday, January 19, 2009

Do The Feds Read My Blog? "Aggregator Bank"

On December 3rd I shared an idea of how to cleanse the banking system in a post entitled "Will Anybody Actually Address The Problem?". The few sentences that explain the idea are as follows:

"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)."

A few days ago Washington started talking about an idea that is very similar - thus far dubbed "The Aggregator Bank" or "The Bad Bank" I've linked to an article from Bloomberg about this potential plan.

This is positive news as it points to the potential that the government might actually do something that will work to solve our underlying problems that started nearly two years ago. While this is positive news, it isn't news yet and would require a lot of work to get done (the government has created this in pseudo form with the Fed (Maiden Lane) and other guarantees they've made). So, this is one step forward. Of course its not possible to take a step forward in government with out taking at least one or two backwards - congress wants to do two things (two steps backward) that would further hurt banks and homeowners. The first is to eliminate a rule the Treasury department modified last year that encourages good banks to swallow up bad banks without any government intervention and the second involves allowing bankruptcy courts the ability to "cramdown" a mortgage to a lender - or allowing a judge to modify loan terms without lender input. This would raise rates for everyone and is not needed. What is needed is for lenders to come to the reality that they need to write down a lot of bad loans with principal reductions not interest rate reductions and 40 year loans. Add in the governments encouragement for people to stop making their payments so that they could apply to have a loan modification and you have a situation where the government has floated an idea (bad bank) that could work and might be a step forward, but for that one idea has created three bad ones.

I predicted several months ago that the government would take two to three more stupid stabs at the current mortgage/foreclosure crisis and get it wrong before finally capitulating and getting it right - costing us two to three times what it would have cost had the problem been dealt with over a year ago.

Another idea I posted has been picked up by Obama, which makes this the second one - are the Feds reading my blog? Doubtful, had they done so we'd be almost out of this mess by now!

Scott Dauenhauer CFP, MSFP, AIF