Rhody Trader

I don’t know how this bailout, RTC type mortgage bailout plan is going to be structured, but I had a thought this morning on my way into work.

My big concern, as so many others are expressing, has been that if the Treasury is going to put $500 bln into the market then we’re talking about a lot more government debt and money sloshing around. That means more stress on the taxpayer and the gov’t budgetary structure, and inflationary implication due to larger money supply. That would mean higher interest rates and obviously higher costs of consumer goods.

Ironically, this plan has the potential to really push mortgage rates higher.

Oh, and we’re still going to have tighter lending standards because we still have bankers who have been burned.

Here’s the thought I had about how at least some of this stuff could be avoided. Rather than the Treasury, through whatever instrument/vehicle, buying mortgage securities we go a different route. We create a trust (or whatever you want to call it) into which all the mortgage instruments go, and that the banks who put the securities in are given shares based on the value of those securities. The final result is the banks all own the trust.  They have the mortgages off their books, and it’s replaced with the shares in the trust – which I suggest should be publicly tradable so the banks can sell them to raise cash if needed. The value of those shares would be based on the principle value of the mortgages, so they would be repaid based on the return of that principle. The government, in turn, gets all the interest payments as it’s part for setting the thing up and running it.

The question which is left, of course, is valuing those securities and how to allocate shares. The valuation question is going to be an issue regardless, so no matter when the Treasury buys them on my idea of share allocation is employed (or some other), the valuation thing will have to be sorted out.

The point of my plan, however, is that if we go this route we can avoid the Treasury having to issue hundreds of billions in new debt, and moreover being in a position to earn income from the deal to help offset potential losses from the Fannie/Freddie takeover or whatever.

Thoughts?

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