5 Step Recovery Plan for America
The views expressed in this commentary are solely those of Richard S. Berg.
Step #1: Restore confidence in housing market.
Solution: Offer price protection for 5 years to any new purchase of a home for owner occupied purchasers.
Rationale: People who are interested in purchasing a home are still aware that the market has not bottomed, and they may become upside down. If the U.S. Government offers “price insurance” of 95% of the purchase price for 5 years in exchange for a monthly insurance premium added to the mortgage, that risk has been eliminated for the homebuyer. The government is currently insuring virtually every mortgage loan written today to the lender; why not to the borrower? Hyundai has established a similar program for new car sales, and it has been extremely successful. This would be revenue positive for the U.S. Government.
Step # 2: Increase spendable cash flow for every homeowner by almost $3,000 per year
Solution: The US Government should offer a 4.50% fixed rate 30 year refinance to every mortgage borrower regardless of loan size and appraised value.
Rationale: Assuming an outstanding mortgage amount of $250,000 at a 6.5% interest rate, the annual savings by refinancing that loan into a 4.5% rate would be $3,768 per year. That extra cash would certainly work its way into the economy! The only criteria is that you have to be current on your payments for the past 12 months in your previous mortgage. This would be revenue neutral to positive for the US Government because they can currently borrow for 30 years below 4%. Freddie and Fannie Mae can sell these refinanced loans as government guaranteed mortgaged back securities. Freddie and Fannie Mae already have most of this exposure; let’s use their mandate to help current homeowners.
Step #3: Eliminate 50% of the “toxic” assets, increase the valuation of the remaining ones and recapitalize the banking system
Solution: See #1 & 2
Rationale: Since the majority of the “toxic” assets are mortgage related, and because the majority of mortgages have been securitized, solutions like the TARP and mortgage remediation have fallen short. What you may not know is that a minority of “bad loans” inside a security can cause the entire security to be viewed as “toxic”. Refinancing the good loans will significantly reduce the amount of outstanding “toxic” securities, and also allow banks to “write up” many of their previous “write downs”. Hundreds of billions of capital and market value would be restored to the financial system without direct government intervention.
Step #4: Heal the banks and restore lending in America
Solution: Pass a 3 year reduction in capital requirements in banks, reduce rather than increase the regulatory scrutiny, and redefine “Fair Value” for OTTI to the “expected loss incurred.”
Rationale: Banks are not lending because they are preoccupied with self-preservation. Banks must keep a minimum level of capital or they will be deemed insolvent and closed. Write downs of “anticipated” losses in advance of the realized losses can be very tricky, especially in this market. Many of today’s write downs will not ultimately result in anywhere as severe as realized loss. Regulation and accounting both contribute to this downward spiral of capital (as well as falling asset values, which #1 will certainly positively impact). Regulators are under intense pressure to “regulate” better, which has an adverse reaction, banks refuse to lend out of regulatory and accounting fears. If we enact numbers 1, 2, and 3, banks will actually become much healthier over a reasonably short time frame period because many of their “write downs” will be certainly not be realized.
Step #5: Stop draining capital from the system that requires more bailouts
Solution: Enact a “mark to market” holiday for 3 years.
Rationale: Did AIG really lose $60 billion dollars? For reported earnings and capital levels the answer is yes, although much of that write down and others’ write downs reflect very long term commitments that may actually turn out to produce vastly different cash flow results. Unfortunately, in a regulated business such as banking and insurance, once your reported capital levels are below minimum, you are effectively out of business unless “bailed out.” MTM caused wildly inflated asset prices on the way up during the boom. Can we at least agree that the current MTM accounting rules are causing wildly negative unintended consequences, and if not halted may ultimately put every financial institution and insurance company out of business? There is a better solution and let’s take 3 years to study what it should be before we cause additional damage.
Interestingly, the implementation of this 5 step program would likely not cost the US taxpayer a dime, but we believe the impact to the US and world markets and economy would be profound.
Copyright 2009. Richard S. Berg. All rights reserved.
Plea to Chairman Frank
A Congressional subcommittee hearing on mark-to-market accounting is due to take place on Thursday. To that end, on Monday, ABA, in a joint effort with 18 trade groups and all of the Federal Home Loan Banks, sent this letter to the House Financial Services Committee that articulated their desire that the aforementioned hearing prompts immediate action to correct mark-to-market accounting rules so that the losses they have brought about do not continue. The letter further emphasized the urgency that this issue demands with regards to enacting changes, due to the fact that these capital losses are quickly and unnecessarily destroying banks.
Continuing Destructive Policies
Steve Forbes is at it again – He makes a simple and rational case in his article, Obama Repeats Bush’s Worst Market Mistakes. He says,
The most disastrous Bush policy that Mr. Obama is perpetuating is mark-to-market or “fair value” accounting for banks, insurance companies and other financial institutions. The idea seems harmless: Financial institutions should adjust their balance sheets and their capital accounts when the market value of the financial assets they hold goes up or down.
This has some politcal point scoring in it, but is good on the basics.
Our Varsity Team goes to Washington!
Key members of our team are hitting the road to spread the word again about mark-to-market issues. Phil Nussbaum and Brian Battle will be visiting with various members of Congress to increase awareness of the impact of M2M issues and, more importantly, help them understand this complex issue. The crushing impact of mark-to-market on our banks and our economy is far too important to be overlooked or examined improperly, so Phil and Brian will be explaining the intricacies and unintended consequences that have resulted from mark-to-market rules and discuss potential solutions with our lawmakers. Check in later for an update when they get back!
