Follow along with the video below to see how to install our site as a web app on your home screen.
Note: This feature currently requires accessing the site using the built-in Safari browser.
Bank stocks have rallied phenomenally in recent days, just as they did in July, last time Washington put together a show of no longer wanting to punish bank shareholders for the credit bubble.
We know how that ended -- badly for bank shareholders. But let's assume the new-look policy signaled by the Obama administration and Congressional Democrats (which includes protecting bank regulatory capital from mark-to-market writedowns) survives the latest AIG furor. It still leaves ignored a huge opportunity to detoxify the so-called toxic assets on bank balance sheets.
Enter Tom Patrick, a former Merrill Lynch CFO and vice chairman who runs a private investment firm, and who has expertise and a palpable hunger to help.
Let's start by noting, as Mr. Patrick does, how dumbfounding it is that policy makers haven't yet hit upon the strategy of untangling what he calls the "real loans" from the dysfunctional mortgage securitization pools underlying the banking crisis. "We have valuable cash flows from mortgages with demonstrated payment records wrapped in a package no one can value and therefore will not purchase," he says.
By now, Washington could have bought and dissolved every one of these securitizations for a fraction of the bailout sums deployed to shield banks from the consequences of holding them.
Mr. Patrick begins by noticing that two-thirds of subprime and Alt-A mortgage borrowers continue to pay on time. Two years into the crisis, housing speculators and those homeowners who leveraged up to finance their lifestyles by now have mostly defaulted. "The riffraff have shaken out," he says. Anyone who's still paying has "demonstrated financial responsibility and a personal attachment to their homes."
Yet because they are severely underwater and don't meet the standard loan criteria, they aren't eligible for any of the government's cheap financing plans, including the Obama team's latest. What's more, big resets on their loans are coming that could push them into default.
Mr. Patrick's solution? Make them eligible. Forget loan-to-value ratios, income documentation, maximum loan balance, etc., etc. Offer them government-guaranteed Fannie or Freddie mortgages based on a single criterion: that they are up to date on their current loans.
He figures refinancing these mortgages at today's low rates would cut monthly payments by 25%. Even assuming all the currently delinquent loans are a total loss, the capital accretion to the banks would be about $429 billion from extinguishing about $1.4 trillion in mortgage derivatives, because of how sharply these derivatives already have been marked down on banks' books.
"You could rewrite four million loans in 90 days," Mr. Patrick says. All you need is the customer lists behind the 3,700 or so private-label mortgage securitizations.
Getting those lists, admittedly, might involve a bit of larceny. Keepers of the confidential lists are the servicing companies that collect payments from homeowners and deal with delinquencies. Not all holders of the securities tranches have the same interests. Some might bellyache.
One fix would be for government to make tender offers for entire securities issues. If it owns the issue, it owns the list. But that approach would run aground on the same problem that sank the original TARP, namely offering a price banks would accept that would still be perceived as fair to taxpayers.
So Mr. Patrick suggests taking the lists by government force majeure (or, impishly, by incentivizing private mortgage brokers to get them by hook or crook), and proceeding with the refinancing offers. Let the security holders sue. Any monetary damages that might be awarded later would be swamped by the gains to banks and taxpayers (recall that taxpayers are on the hook for about a third of subprime losses through Fannie and Freddie and guarantees to Citi, BofA, Wells Fargo, AIG and J.P. Morgan).
Here, we pause to hope Tim Geithner is reading. His slowly germinating plan wouldn't unwind the troubled securities. He would simply subsidize "public-private" partnerships with vulture investors to buy them from banks. He might want to notice how the public-private partnership that AIG has become is faring -- with a U.S. senator calling for AIG executives to commit suicide.
Even if Mr. Geithner can find hedge funds willing to expose themselves to such political risk for participating in Treasury's plan, he'll have to promise them over-the-moon returns. How will that play politically?
