Bailout Update

Bailout Crisis Update!

Well it has been about two months since my last posting and most would agree that the $700 billion bailout plan has been a disappointment to say the least. Many of my friends on Wall Street have told me that my solution to the mortgage crisis is too simple for those in Washington to embrace. I am beginning to believe them. Nevertheless, I will continue to spread the word in hopes that enough people will understand that this plan will work, it is simple to execute, and is in fact already being executed in the private sector on a very small scale. I am hopeful that everyone that reads this posting will write their Representatives urging them to support this plan, or one very similar, so that we can restore confidence in the marketplace. Maybe with a little luck and your help, a few of our Representative's will read and absorb this entire posting and when they return to Washington for the next session, they will have an open mind and some new ideas for a modified bailout plan. I believe the following steps are financially responsible and worthy of the risk associated with the use of our hard earned tax dollars! If the following post makes sense to you, do your part as a VOTING American taxpayer and pass it along to your friends, family and more importantly your local Representatives.

As of December 17, 2008

I have now received two responses to the many letters and emails sent to various Congress and Senate representatives, the most recent from Senator Richard Shelby's office. It is apparent to me that both responses were nothing more than a standard response prepared for any comments related to the bailout crisis. I only wish that Senator Shelby or his staffers would have read my entire letter to see that my contention was not that I wanted him to vote for the bailout, but rather use his seniority to work diligently to modify an already passed but flawed bailout plan. Instead, I received a position letter on why he didn't vote for the bailout. With all due respect, that position has nothing to do with the fact that the $700 billion bailout package was passed and we need to modify the way it is being administered. Here are the facts as I sit hear typing this posting today at 4 a.m.:

1. The package has had some limited effect in calming/shoring up the troubled financial markets. However, I believe this to be only in the short term. What it has not accomplished is alleviating what is at the root of the problem and started the financial collapse....THE HOUSING CRISIS. UNTIL THE HOUSING CRISIS IS ADDRESSED ALL OTHER MEASURES TAKEN WILL ONLY HAVE LIMITED EFFECTS AND ULTIMATELY BE AN EXERCISE IN FUTILITY!
2. One of the the reason banks and financial institutions are having problems is an accounting standard called "Mark to Market." I believe if modified, this could very well be the single most powerful tool, if used properly, to stimulate a true bailout. I will write more on this later in this posting.
3. The housing crisis has not been solved and will not be solved unless we address the demand side of the equation. Lets face the facts, the supply side is working itself out through a near halt in housing starts, that are now at the lowest since records have been kept! Nevertheless, we haven't found a way to stimulate the demand that will clear out the perceived over supply being continuously reported in the media.
4. My modified bailout solution (buying mortgages from institutions at a discount and renegotiating with home owners at much reduced rates) posted in October is being played out by some of the very folks that created the problem in the first place and they are profiting in a huge manner. In addition, some relatively small funds are getting in on the opportunity and are also profiting handsomely but its not enough to make a major impact on current demand, as these funds don't want to get the word out too fast because with more players brings more competition for the mortgages and hence smaller spreads between what they pay the bank for the mortgage and what they are able to renegotiate with the home owner.
5. Banks are NOT lending the TARP funds they have received (our money) and in the case of loan renewals, they are raising rates charged to their best customers in a falling rate environment, making it even more difficult for individuals and companies to continue to operate. This has resulted in an outcome that is directly opposite to that prescribed by the Federal Reserve.
6. Long term 15 and 30 year mortgages are at historically high spreads giving us mortgage rates that are artificially inflated by approximately 1%. Historically, given today's currently traded government bond rates, a 15 year residential mortgage should be approximately 3% and a 30 year mortgage should be approximately 3.5%.

THE SOLUTION:

I believe our government is trying to solve the crisis in the wrong manner. We must address the demand side of the housing crisis, which will in turn "TRICKLE DOWN" into all facets of the entire International economy, including the automobile industry . Here is how I believe we need to address the housing demand issue, which will provide a bottom for the artificially deflated housing industry, allow distressed home owners to remain in their homes with dramatically reduced mortgage payments, restore home equity, get ride of "TOXIC ASSETS", provide a profit on tax dollars invested and result in restored confidence and more liquidity for the average home owner! With more liquidity and confidence the consumer will be enabled to start purchasing cars, furniture, etc. that will ultimately restore the Auto and other industries currently heading toward bankruptcy! HERE IS THE PLAN:

1. Allow the Federal Reserve to purchase long term bonds in enough volume to spur demand and force spreads down. This would result in the 30 year mortgage rate of approximately 3.5%.
2. 3.5% 30 year mortgage rates coupled with tighter lending practices will create a very healthy demand for housing and a financially sound lending market.
3. Modify the $700 billion package to force financial institution that have chosen to take government funding from the TARP, to assign (notice the word assign NOT sell) all of their mortgage pools, which by the way have been Marked to Market at 10%-40% of their original value, to a quasi government agency called the Mortgage Trust Corporation (MTC).
4. The MTC will be responsible for renegotiating each and every mortgage in a given pool to make certain that the end result is a long term paying home owner.
5. The MTC will make certain that foreclosure is a method of last resort, given the fact that any negotiation yielding 20% or better above the current Mark to Market pricing gives the financial institution a true profit. A simple example is that the MTC is assigned a pool of mortgages (TOXIC ASSETS) on the books of a financial institution at 30% of the face value of all underlying mortgages in that pool. This means a $100,000 mortgage that for example our fictitious home owner (Bob) took out with AAA mortgage company that is now part of this mortgage pool and is only valued at $30,000 on BIG Bank books. The MTC could go to Bob and renegotiate the mortgage terms and reduce Bob's $100,000 to $60,000 (60%). Remember, BIG Bank only has Bob's mortgage valued at $30,000 on their books, so they have already taken a loss of $70,000 on that mortgage. The net result is that BIG Bank just made a profit of $24,000 ($30,000 less the 20% of the profit we will give to the MTC for renegotiating the Bob's of the worlds mortgage in order to cover expenses so that the taxpayer is not left holding the bag for this mess.)
6. Forcing all institutions taking TARP money to participate in the MTC program will be the major catalyst in solving the demand problem we have in the housing market. This action alone, will clean up the so called toxic assets and create a new market for mortgage securities. However, we need to do one more thing before we claim victory and that is to address "Mark to Market" going forward so this mess doesn't start all over again.
7. Mark to Market works in the following manner: 1. BIG Bank has a pool of hundreds of mortgages and a small percentage of those are non-paying, so SHARK INVESTMENT COMPANY offers institution BIG Bank 20% of the principal value of all mortgages in the pool because they are now considered TOXIC ASSETS. BIG Bank agrees to sell it to SHARK INVESTMENT COMPANY because they desperately need capital to keep the doors open. Keep in mind that the net present value of the cash flows currently being paid by those mortgages equates to 90%+ of the original principal values, but because BIG Bank needs the capital we have now established "a value" for those securities. Now every financial institution has to place that value, however artificial it may be, on their mortgage pool. Hence "Mark to Market."
8. Don't get me wrong, I do not believe in abolishing Mark to Market all together, but I do believe we should modify it to represent the underlying cash flow provided by the mortgages in the pool. With that said, on a monthly basis the institution would simply perform a discounted cash flow calculation for each mortgage or mortgage tranche in a given pool, resulting in a true monthly value for that mortgage pool or should we say a "Mark to Cash Flow."
9. This new "Mark to Cash Flow" model will represent the true underlying value of the mortgages in a given pool and going forward, Wall Street can apply an appropriate discount it feels would be acceptable for taking the risk of holding these securities for the long term. In addition, the financial institutions that have these mortgages on their books will have them valued appropriately on their books. This will result in an instant write up in assets (profit), which will create the much needed Tier One capital many of them need to start lending again.

CONCLUSION:

Attack the housing demand problem and make the American Dream of owning a home a reality once again!

1. The Fed's action to purchase long term bonds from the treasury will push the 30 year mortgage rates down to 3.5%, allowing a release of pent-up demand and creating affordability in the housing market.
2. The newly formed MTC will significantly reduce foreclosure rates and shore up financial institutions by renegotiating the mortgages that exist in the pools owned by any TARP recipient.
3. Mark to Market is modified to Mark to Cash flow, resulting in a write up in the assets that exist on non-TARP recipient banks and the future assets of all financial institutions.

PLEASE HELP RAISE AWARENESS

If the following post makes sense to you, do your part as an American taxpayer and pass it along to your friends, family and more importantly your local Representatives. It is as simple as copying the following link http://www.bailoutcrisis.blogspot.com/ and sending it to everyone you think will read it and do something about making a difference!

Main Street Needs Help from Bailout Plan

Yes, the Bailout Bill passed!
AND
President Bush has signed it into law.

However, we still witnessed the stock market falling off the cliff on Friday and consumer confidence continues to be at an all time low. Why? Because D Street(Washington) and Wall Street don't understand that Main Street (the American worker and small business) keep this economy moving. Without Main Street spending money, Wall Street and D Street can't survive. It's about time we let Washington and Wall Street know that We The PEOPLE are the drivers behind this economy. Before you read this blog, it should be noted that on Friday, September 26, 2008, I called and wrote many in Congress and the Senate to introduce this modified plan, for I truly believe that we need to reignite the consumer confidence. However, I received only one response, and that was from Senator Jeff Sessions office in Huntsville, Alabama. I plan to speak with his aid on Monday to get their response to this modified plan. We need to get Main Street American taxpayers back to the cash registers and into the bank teller lines making deposits, instead of sitting home watching the bad news and rushing to their local bank to withdraw their hard earned savings.

THE CURRENT PLAN

Now that the bill has passed, Treasury Secretary, Hank Paulson, will be purchasing up to $700 billion in mortgage backed securities from our financial institutions at their current market values, which today are trading at 20-50% of the original value. This will create much needed liquidity to our financial system, but I don't believe it will be enough to encourage the banks to start lending to small businesses again. By the way, don't kid yourself, this bill authorized $700 billion at a time. We all know that $700 billion is a large sum, but it's not going to be enough to solve this crisis. That is why the bill was written with the language that allows Mr. Paulson the ability to purchase up to $700 billion in assets at a time. As I understand the bill, the government will buy $700 billion, sell off a few hundred billion and then go back to the financial institutions and purchase a few hundred billion again. This is what I would consider a revolving $700 billion line of credit secured by YOU, the American taxpayer.
After these mortgages are purchased by the government, one of two things will happen. First, the government will be holding these mortgages until the markets improve. Second, when the market improves, the government will be selling them off, at a small profit, to some of the very same groups of Wall Street institutions that created this mess! The important point here is that the "Markets Improve."

THE MODIFIED PLAN

The fact is, the only way we can get the "markets to improve" is to get Middle America back to feeling confident about the economy and confident about owning a home. The last time I looked, owning a home was still the largest single investment made by most American taxpayers. This leads me back to how I believe we can accomplish true economic stimulus with the recently passed bailout plan. First, every American taxpayer, having a mortgage that has been purchased by the government under this bailout plan, should be given the same opportunity as Wall Street, to repurchase that mortgage (in this case, their own mortgage) from the government. They would be able to purchase their mortgage at a 10-15% premium over the government purchase price. The end result is an instant WIN/WIN for all involved. The homeowner gets to stay in their home at a much lower price, the Government will be paid back the $700 billion+ debt much faster, the housing market will be stabilized quickly and the American people will once again feel confident about spending, which will in turn stimulate our economy. After all, private equity and Wall Street are currently setting up newly created investment funds to purchase these assets from the government under a very similar arrangement. In order to stimulate the economy through this modified plan, every American taxpayer with a mortgage purchased by the government under the bailout plan, should be afforded the same opportunity as Wall Street - to repurchase their mortgage and thereby reduce it by 30-65%.

THE SIMPLE, BUT REAL EXAMPLE

Under the modified plan, if you had a $100,000 mortgage balance and it was one of those purchased by the government, you would be afforded the opportunity to reduce your mortgage by purchasing it back from the government at $30,000 to $65,000. The price would depend upon the price paid by the government under the bailout bill plus a 10-15% premium. This premium would cover the costs of government processing and provide funds to cover any shortfalls that may occur due to truly "distressed assets." The end result is that you have now reduced your $100,000 mortgage down to $30,000-$65,000. This is real economic stimulus for Main Street America and what I believe is missing in the plan.

THE FACTS

Make no mistake.....Congress and the Senate DO NOT have to vote again to authorize Treasury Secretary Paulson to modify the execution of this bailout plan. Under the current plan signed by President Bush on Friday, October 3, 2008, the American homeowner is authorized, just like Wall Street or Private Equity to purchase one of these mortgages/assets from the government.
The modified execution of this plan would immediately stimulate the economy. Given the option, what American homeowner would not take the opportunity to decrease their mortgage under this plan? More importantly, it will make the mortgage payments affordable again for those that were victims to the predators of the teaser rate mortgages. Yes, those foreclosures on your street will come to a screeching halt, your neighbors will be keeping their home and they will begin cutting their grass again! And YES, the American dream of owning a home will continue to be the ultimate goal for our children and grandchildren for centuries to come.

SUPERIOR RESULTS!

When this modified execution of the plan is adopted and American’s have the opportunity to repurchase their mortgages from the government at the same discount afforded to Wall Street, everyone will begin spending with confidence again. The housing crisis will be instantaneously resolved. Local shops, restaurants and automobile dealership will prosper once more. The superior results will be that the economy will get an instant jump-start; the American taxpayer will feel confident about their jobs, confident about owning a home, and confident about the future of America!

TAKE ACTION!

No, this may not be as interesting as those YouTube video's being passed around these days, but it is much more IMPORTANT! With your help, we can get this message out to everyone on Main Street, which in turn gets the message to Washington! Let's do our part to take the steps needed to get out of this Recession and avoid another Depression. Our political Representatives need to know that we do UNDERSTAND the current crisis. Join with your fellow Americans and demand to be part of the solution! After all, it is our money that will be used if the plan doesn't work! Please do your part and pass this blog link around to all of your friends and let's get the message to Washington, so that WE THE PEOPLE can HELP solve this crisis!

Bailout Crisis Needs to Help Main Street

I have stood by and listened to all the rhetoric over the bailout plan and want to give our Representatives a chance to help the American taxpayer, instead of just using us as additional collateral for this $700 billion loan to the government. It should be noted that I do believe we should pass a plan because it is the right thing to do and the Government will make money on this deal. However, we need to take significant actions that will not only help stablize our banking system but help bring the consumer back to the cash register.


I understand the reluctance by many of our representatives to pass this bill; however, I believe they should consider the following as an option to be added to the Senate approved bill so that we can sincerely help the American people and not just Wall Street. Here is a summary of the very real solution that would bring Main Street to Wall Street! My plan is that we simply let Paulson execute his plan (with the added Slyman Plan option). We all know that the government will be funding the purchase of these mortgage backed securities at 20-50% on the dollar. This will take these securities off the balance sheets of the financial institutions that have purchased them and provide the needed liquidity to restart our banking system. In turn, with my plan, Paulson and team will send letters to the Main Street (homeowners) and offer them the opportunity/option to purchase their own mortgage(assuming it is included in one of the government purchased pools) back from the government at a 10-15% premium over the government's purchase price of their individual mortgage. This would allow Main Street to reduce their mortgage by anywhere from 35-65%, creating an instant market/exit strategy for the Government. The premium over the government purchase price would cover those mortgages that may be troubled and reduce or eliminate any potential loss to the taxpayer. Any residual mortgages left in the government purchased pools would be the truly "Sub-prime" or "distressed assets". These assets could then be sold to the newly created Wall Street Funds at a significant discount, taking the government out 100%. I believe every American would agree that given this option, individuals currently paying their mortgage or those that just stopped paying due to their teaser rate being adjusted to market rates, would not turn this type of offer down. This is a true win/win for the government and the taxpaying public. It would be an instant economic stimulus and the catalyst to getting America out of the housing crisis. The reluctance by the Senate and Congress to pass this bill would go totally away, due to the fact that their constituents would no longer feel like the government is spending taxpayer money without a true exit strategy. The new and improved fail safe exit strategy will be to help the American taxpayer reduce its current mortgage debt, which in turn would generate the needed funds for repayment of this bailout plan. Politically, I believe each party would be off the hook! The smart money knows that 87% of the sub-prime mortgages are current, so with only 13% in the non-performing category, this plan would make the treasury money and make Main Street (homeowners) with mortgages in these government pools very happy. In fact, with this approach, I believe many of the non-performing mortgages would now be at a manageable level for those that got behind, because their mortgage would now be 30-50% lower than the original mortgage. This would include those that couldn't make the adjusted payments due to the increase from the teaser rates that got so many Americans into trouble. These Americans would now be able to manage the payment and stay in their homes, reducing the rate of foreclosures tremendously. After all, why should we give those that the American taxpayer considers, Wall Street, the opportunity to profit from dumping these mortgages on the government. Instead of having Wall Street turn around and start new distressed asset funds to purchase these mortgages at some small rate above the rate at which they were sold to the government, we need to help Main Street stay in their homes by allowing them the same opportunity to repurchase their own mortgage from these government acquired pools. Any IRS gain that would be generated from a reduction/forgiveness of debt needs to be waived in this case. I respectfully submitted this plan (The Slyman Plan) for your consideration and hope that you will introduce this into the bill and work with our representatives to move this great Country forward.