Friday, September 19, 2008

Addressing the actual problem

So...the government has finally decided to set up a fund to buy up the bad debt. Hurrah for common sense.

There are lots of questions but at least we are now looking at the problem which is the crack-up in the housing market and the related mortgage-backed-securities (MBS) gone bad.

I think this is what is driving the rally: that Paulson, the Fed, and Congress are now focused on the actual problem--rather than spending all day trying to save institutions that are failing as a result of the problem.

I'm hopeful that a well capitalized fund (at least $1 Trillion) is established that is able to buy housing debt and MBS limited to the housing stock in the US. Considering that it will be buying "toxic assets" on a "unimaginable scale" I'd call it a super-duper-fund(SDF).

I would suggest that there be a series of competitive bidding reverse auctions (like a government bond auction--but backwards) where market participants are allowed to submit a price and an amount of debt/MBS that they would sell at that price. I think a series of auctions would allow the SDF to buy different classes of debt (prime, alt-a, sub-prime and whatever else they come up with) at different prices.
The SDF can decide how much of each "asset" type it will buy (reserving the option to not spend everything its got).

I would insist that it buy every security at a steep discount to "face value" and pass along at least a fraction of the discount to the home-owner in reduced mortgage payments/restructured mortgage terms.

We shall any rate people are beginning to ask the right questions.


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