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Web Letter

The "they know nothing" crowd is up to their old tricks again. Secretary Geithner, Larry Summers, Ben Bernanke et al. are desperate to save certain bondholders from insolvency, but they and the president are simply throwing good money after bad. The only real solution is to restructure debt, and until we come to that conclusion we may as well do nothing.

The rest of the world is looking to the United States for real leadership that will break up the current political power structure of modern finance. Simply put, we must not allow ourselves to be subjected to extortion by a handful of large financial companies that have not operated, even remotely close to their own best interests, let alone in the interests of the American people. These companies knew exactly the risks they were taking, but hoped to be the first ones to close their positions and let the others go down in flames. Who is in charge here? Is it the banking moguls or the Congress and the president?

So far all of the bank bailout plans we've seen rely far too heavily on taxpayer dollars, and an outright refusal for insolvent banks to shed toxic assets at market prices. Ultimately the crisis we find ourselves in lies with the inability of millions of holders of both residential and commercial mortgages to service their debt--it is simply not feasible in this market, and frankly not likely in any point in time in the near future. Until we come up with a solution that would allow mortgagees to service their debts with current income levels, then we solve absolutely nothing. The spread between debt and income is just too immense and is getting more severe by the day.

If one solution is to simply inject more cash into the system and allow banks to continue to hold toxic assets, in time we will all be right back at the same table asking for trillions more of bailout dollars. We will ask ourselves how come these consumers aren't paying their bills--well, they don't have the income, and furthermore the forecast for the income levels needed to service this debt is nonexistent and would potentially only be available in a hugely inflated economy. A large increase in "bailout" inflation can only come from huge government debt and further devaluation of the dollar.

Here's my plan and it is similar to the original Resolution Trust Corp in theory, but with a twist. We need a massive and uniform nationwide plan to write down mortgage principal amounts to affordable levels based on real income data. This would give us a realistic price discovery for real estate values virtually overnight and put a floor under housing and commercial properties. It would also realign consumer debt to incomes ratios that would allow normal discretionary spending to resume quickly.

In exchange for this service, any individual, married couple, business group, etc. that takes a principal write-down has to carry with them a "future real estate appreciation" lien on their Social Security numbers. The lien would be proportioned out to anyone whose name is signed on the bottom line. At any time in the future that they sell any real estate, and there is a realized gain, then those funds would be used to pay off the outstanding real estate lien--let's even make those "pay down gains" tax-free if you want. This could even provide incentive for someone with a lien to go out and find a property, now priced correctly for the current market, fix it up and sell for appreciation gains to pay off old debts. Since financial institutions are equally culpable, they should absorb half of any mortgage principal write-downs. I hope financial responsibility, at least at some level, is not a virtue we as a nation are willing to completely sacrifice.

At the same time that we are writing down the loans to a new principal level, we should extract additional equity principal from the owner to finance upfront a life insurance escrow pool (assuming they don't have cash in hand). This life insurance pool would pay for those individuals who carry an "appreciation warrant" but who might chose to never buy real estate again, and thus not have future property gains, and/or protect against those that might die before they had a chance to pay back the lien. It could also eventually pay for any final debt outstanding for some person or business that had any remaining partial unpaid lien balance. There would be no need for medical underwriting, as we could reasonably assume that this population would be a good cross-section of society and any individual lien should not be "too large." The insurance is strictly only for lien payoffs.

The final part of my plan solves two huge problems that we are currently faced with under any current proposals on the table. I suggest we could take these "real estate appreciation liens," package them up, slice them into tranches and sell them off to private (perhaps some public money if needed) investors. Government is the only entity that could bring back all the pieces of securitized mortgages now in the marketplace.

Bond holders of these units are virtually assured that they will be paid back, as we have now reset real estate levels to a new, sustainable level. We can't predict the future, but I'm pretty certain that if we reset our real estate values to sane levels today, then we should have normal appreciation going forward. In the event that real estate goes negative or sideways for a very long time, well, at least all lien designees have a life insurance policy against this debt that would ultimately pay off. A bit morbid and pershaps draconian, but true.

I believe that this repackaged debt to be sold by the current holders of mortgages (banks and others) would generate a far higher price than "fire selling current toxic debt." While the greedy vultures sitting on the sidelines ready to pounce and become wealthy with the help of taxpayers might be very disappointed, I think these new bonds might easily sell for $0.80 on the dollar or even higher. The currently compromised (insolvent) banks would be freed up of a large percentage of bad debt, generate large new cash amounts from the sale of the bonds and keep cash flow coming from the newly established mortgage levels of existing mortgage holders. Little or no taxpayer cash involved!

Those whom might cry, "I played by the rules, but got screwed anyway" might be stroked by getting a one-time bonus for good behavior. Perhaps those that hold a mortgage and never take a write-down get a tax write-off in any given year of their choice. Find something, even if it is a token gesture, to assuage their rightful anger.

The basic question that has to be answered is, "Who is going to pay for the losses and get our economy moving again?" We obviously have lots of villians we could point fingers toward, but at the end of the day folks who put their name on the dotted line and the risk crazy bankers should be responsible for the bulk of the payoff.

The level of trust that we have in our government and our institutions is at a major low point in our history. We need a workable plan to rise to the challenge we face--to bring the power of our systems back to the people. If Congress and the president don't succeed, I'm afraid an entire generation, or more, of voters and taxpayers will be disenfranchised, and that will weaken our country further for years to come.

Matt Hobson

Bend, OR

Feb 19 2009 - 7:33pm

Web Letter

I thought that's what the FDIC was for. Worked in the '80s, why not now?

Robert Bailey

Houston, TX

Feb 18 2009 - 1:49pm

Web Letter

"The highest price the assets would fetch is about 22 cents on the dollar, even though in a few years they are likely to be worth much, much more." Really? Defaulted loans are likely to be worth more later on? The average real estate cycle is about ten years. We won't hit bottom until 2011 or 2012, by which time the underlying real estate will have been sold and the losses booked.

He did get one thing correct, we need to nationalize the banks. Watch for him to vomit up a plan to help his buddies, the Bond Boys, in the nationalization.

Michael McKinlay

Hercules, CA

Feb 18 2009 - 4:30am

Web Letter

The logic is impeccable, and should also be applied to the Zombie Automotives in Detroit.

John D. Froelich

Upper Darby , PA

Feb 17 2009 - 3:17pm

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