Its ironic that critics of Fannie Mae and Freddie Mac wanted the private markets to do more. For many, the private market works just fine. No need to interfere.
Yet it is the natural outgrowth of the private market in the mortgage industry that now poses a real danger of 'systemic risk' to the broader economy. It is the alt a & subprime mortgage markets, an area that Fannie and Freddie do not participate in a measureable fashion, that has exploded, causing a shut down of the short term credit markets. The entrepreneriaul mortgage bankers created, with the help of the barrons of Wall Street where pure capitalism exists and rules, dubious loan products that Fannie and Freddie would never buy.
The WSJ has an interesting article about recent statements from Moody's about pending downgrades of mortgage related assets that will cause SIVs to further sell assets to meet guidelines, and that this selling will in term cause pricing to further deteriorate.
The effort that the US Treasury put forward was exactly what this market needed- a new buyer. But the proposed structure does little more than borrow time. Will an SIV backed by several institutions really have better access to short term funding? Does it address the fundamental issue of borrowing short to lend long? FM Watch and the WSJ editorial board take Fannie and Freddie to task at every opportunitiey, but have I missed the similar editorial criticizing these private institutions, market driven companies that engaged in a 'reckless' practice?
If the US Treasury and these SIV managers want to create a solution, I give them my idea, free:
Charter a new investment fund, similar to Fannie and Freddie. This new institiution will issue long term debt and equity to fund the purchase of mortgagte related assets: MBS, CDOs, whole loans- whatever. It will issue debt and equity to both the public, and to the holders of unwanted assets in exchange for those assets. The key is the pricing of those assets will be determined not by the seller, but by a team of actual mortgage experts (Fannie & Freddie??) who can accurately determine the value of the underlying assets.
Further, this new fund will enable servicers to ammend loan terms on loans determined to have not been in the fiduciary interest of the borrower, such as a 2/28 where the borrwer barely afforded the teaser payment, but would not qualify under the adjusted rate and repayments.
And just to give a little agita to the FM Watch types out there, the US Governement, through some structure, will provide a guarantee or re-insurance of the risk of non papyment on the mortgages.
Thus, pension funds that own an asset they like, such as an MBS, can sell this now, not at market price, since the market is failing, but at a price more in line with ascertained value of the underlying asset. And, they can do so in exchange for debt or equity in a new company, thus maintaining their desire to match investments with their exposures, but with increased liquidity and transparancy.
Since there will be an implied guarantee from the US government, the debt or equity should trade well. And this new entity will be positive cash flow day 1.
IPO, anyone?
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