Main Street buying Wall Street for pennies on the dollar… The Blue Collars even up the Score!!!
By Guy D. Glennon, [email protected]
Moral Hazard of Inaction
The demise of American Financial Companies will affect all Americans. The Credit Markets will be the catalyst to paralyze all Americans. Paralyzed credit markets will impose significantly fewer car loans, home loans of all shapes and sizes, private and public capital investment loans, small and large business loans and credit lines to make payroll. The velocity of money would decelerate substantially. The velocity in which financial transactions (all activities which require payment) take place is directly proportional to the health of a growing economy, Gross National Product and Government’s Tax Revenue.
Many Americans feel the most stable and secure, “recession proof”, jobs are held by government employees. The fact is, the government is able to make payroll with a budget based on expected tax revenue. If expected tax revenue declines the government will be forced to cut vertical and horizontal costs (e.g. Social Services, Defense, and Education) or increase the national debt (which will exacerbate a starving credit market for cash).
Mortgage (debt) securities are assets. The value of these assets is proportional to the value of the homes in your community and the ability of the people in your community to pay on the debt. Main Street (taxpayers) should buy Wall Street’s assets for pennies on the dollar, detoxify the assets, insure the revitalized assets and sell the assets at market rate over a period of time. Doing this is “non-capitalistic” to purist; but, doing nothing is a moral hazard to all Americans.
What to do now:
• Use $700B to purchase $3,182B (22% of face value) worth of “toxic” assets (mortgage back securities). • Develop a strategy to “detoxify” the $3,182B assets by lowering the default rate of the mortgages
Course of Action:
• Expeditiously conduct a reverse auction of these assets to attain the maximum amount of mortgage back securities that $700B US dollars can buy. For the purpose of analysis, an aggregate Main Street purchase of Wall Street at 22 cents on the US dollar. Therefore $700B USD can buy $3,182B assets.• Develop a systematic process to write down the value of these asset backed mortgages to 80% of current market value based on Local Market Analysis (leaving the USG taxpayer with a 20% equity second position which will expire after a calculated period of good payments to ensure a rapid sell off does not occur: approximately three-12 years based on the mortgage’s write-down factors and local market condition). This would lower the aggregate face value of the assets by 50% (conservative figure, dependent on local market). • Setup a system to “re-qualify” the struggling homeowners of these securities based on the mortgage write-down factors, low fixed interest rate payment, solvent debt to income ratios and sound lending standards. The ultimate goal is keep American in their homes who are capable of affording them under the new conditions (lower payments and loan value), create an incentive for the homeowner to “pay as agreed” and limit the number of foreclosures to “healthy” historical levels which will lead to stable markets.
• Federally insure and sell these “detoxified” securities with a taxpayer 20% second position which will expire after a calculated period of good payments to ensure a rapid sell off does not occur (three-12 years based on the mortgage write down factors and local market condition).
Taxpayer Windfall: $656B