Wednesday, December 03, 2008

Late night financial thoughts---better than still thinking about them when I should be sleeping

---Senator Durbin is pushing hard for a "temporary" change in bankruptcy laws that would allow bankruptcy judges to modify the terms of residential mortgages. He's apparently worked unsuccessfully on this for much of the year but the tide may be turning in his favor. He argues that "that this is a bailout that wouldn't cost anyone a dime". Now wait a minute. Foreclosure relief is an important idea but let's tell the truth about what we're getting into. Most of those mortgages are components of mortgage backed securities that are already down significantly in price. Those mortgage backed securities are owned by pension funds, mutual funds and individual investors. Isn't it fair to say that there is the possibility that all of those mortgage backed securities would decline further in price if unlimited discretion to cut principal, cut rates, or forgive even to only the consumers ability to pay today were given to every bankruptcy judge in the country. All financial markets hate uncertainty and this could be chaos, and would definitely be an almost impossible task for the mortgage servicers and for the custodian banks that manage the bonds.
There would be a ton of money lost. And just think, at a time that the Treasury's goal has been to stabilize credit markets and build lost liquidity this would be like taking a shotgun out and blowing Paulsen's foot to smithereens, as well as assuring that much of the TARP already money spent would be down the drain.
There are so few experts who can see the whole picture on this, and I am certainly not one of them but "it wouldn't cost anyone a dime" is a simply naive statement. That makes the likelihood of passage in Congress excellent.
Foreclosure relief needs to be thought through with uniform limits for all bankruptcy judges, with provisions that investigate the ramifications for the processors, meaning the servicers and the custodians. It needs to exempt developers and flippers from any relief. This is not simple. Apparently even Obama has voiced his support for this. Does he want foreign investors to ever buy securitized consumer assets from the U.S. again, if they know the terms and conditions of the bonds can be changed at any time just like in some developing countries.
The thoughts are now out on that one so sleep may come later.

---There is nothing anyone can really add to the car company financial commentary. It's all up in the air. Bankruptcy would be so dangerous now as the cascading impact could add another crushing blow to this perilous economy. As I've said before, take the risk, give them some money whether they deserve it or not, and let them go under a year from now if there's not radically aggressive and enlightened management demonstrated. Extract from them through government mandates a "green" program with time limits and production targets and research commitments while their backs are against the wall. That's a positive for both the environment and national security.
The idea of pre-arranged bankruptcy for GM and Chrysler as a quid pro quo for funding has been raised tonight apparently. That would avoid liquidation and would reassure suppliers that the factories are still running. It could attract new private credit because in a bankruptcy new creditors(debtor in possession financing) are senior to everyone else on the credit heirarchy. Maybe that's a good compromise. Maybe it's not considering that this would put Ford, the company that has managed its balance sheet better, at a competitive disadvantage and lead them unfairly down the same path. But it's not clear that anything can overcome the leadershipless and simplistic populist consensus that has developed in Congress.
Just as on the foreclosure issue, the simplest and most dangerous ideas are viewed as the most attractive. Why go back home for a Christmas holiday and have to explain a thoughtful decision that you(congressman)have no understanding of whatsoever when you could pass some piece of legislation that can be explained in one sentence.
Whew, I'm now tired.


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