Fixing the subprime mess: A Modest Proposal

Mark R Anderson — Mon, 11 Feb 2008 17:02:01 -0500

Now that both Wall Street and the federal government have had their turns to take multiple whacks at emergency fixes for what most people call the subprime loan crisis, the results are clear. The first effort, an ad hoc move by central banks to catch the problem in time, turns out to have been too little, if not too late (The euro folk put in 350 billion euros in just one week last month.) A more recent attempt by Treasury Secretary Hank Poulson to rally private banks worldwide, led to a few large-scale independent cash injections, but no one bought the unified bank action package, and it literally evaporated as individual banks chose to take huge write-down baths one by one (Citibank, $18 billion to 24 billion and counting; Merrill Lynch, $10 billion to $27 billion).

The next attempt was by Congress and the President, with predictable results: Agenda items forced forward, without any serious chance of accomplishing something smart. Result: imminent passage of a $150 billion spending bill, which, as far as I can tell, has not been perceived by any living human being as likely to solve the problem. Giving about $600 to each taxpayer will turn out to have been a really stupid waste of money.

Then there was the second Paulson effort, via the G8: Let's act together as civilized nations. The result was clear this week, as Japan, France and Germany openly blew off the proposal, and Australia raised (instead of lowering) rates. Message to the U.S.: It's your problem, you caused it, you fix it. Subtext of Message to the U.S.: You're idiots.

OK, that about brings us up to now.

It occurred to me that there might actually be a way of fixing this mess without going through a depression, continued recession (we're in one already), or other painful gotchas for acting so stupidly in the past. Since nothing good is free, this isn't, either, but it has a number of winning points that might make it the best answer put forward yet.

Here is the Modest Proposal, as it currently stands:

1. Take all of the packaged securities (SIV, CDO, etc.), and unpackage them: i.e., look at what is inside.

2. Identify all of the loans currently or likely to be in default.

3. Offer the debtors/signors on each failing loan a new deal: we'll reduce the monthly payment on this by X to get you into an achievable payment zone (what it was before the last refi, for instance); in return you (debtors) agree to extend the loan by Y years to make up for the shortfall.

4. If any injection of funds is still needed, use it for this purpose (reducing monthly payments on extended loans) rather than as a consumer giveaway program. Specifically, trade off a monthly reduction in payments, for a partial interest in the appreciation of the house over the course of the loan.

5. Result: almost everyone involved in the scam part of this debacle takes a small but sustainable hit, but everyone survives: debtors keep their homes, banks do a slight (not massive) write-down, investors do the same (no market collapse), the liabilities are identified and dealt with, game over, life goes on. Mortgage brokers and appraisers will have to wait for the combined hammers of bankruptcy law, the FBI and the SEC for their turn at justice.

Mostly, it just means people have to wait for some of their money.

Sound too simple? Maybe it is. Maybe I'm crazy. Or maybe it's the best answer yet, and Hank Paulson ought to give this one more try, this time with something that will make a difference and really solve the problem.

Mark Anderson is CEO of Strategic News Service (TM), publisher of the technology industry's most accurate publicly-ranked predictive letter, at www.stratnews.com. He is also CEO of SNS Project Inkwell (TM), bringing appropriate technology design standards to K-12 classrooms (www.projectinkwell.com), and Chair of the "Future in Review (TM)" Conferences (www.futureinreview.com). He is a Contributing Editor to the Industry Standard.

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