Joseph Lee's Perspectives
My view of the world
September 19, 2008--The Banking Bail-out-- A walk down memory lane to the RTC

                Well, I guess the Feds are going to try the unthinkable.  I wrote that the only way to resolve the financial crisis is to deal with the underlying problem—the housing crisis.  Banks need to unload the mortgages, and the mortgages need to be repackaged and sold, and the homes that serve as collateral must be put out to the open market.  This was done in the 1990s (checkout S&L Crisis on wiki-pedia) through a government sponsored entity the Resolution Trust Corporation (RTC).    In those days, the bailouts cost about $160 billion.  Estimates are that the current version may cost over $500 billion to US tax payers (MSNBC).

                I’ve been advising all my clients from a year ago that the current crisis resembled those days, and that without resolution of the housing crisis, nothing will be solved—just band-aids on a sinking ship (for a more professional insight into the financial turmoil, take a look at some Chicago economists article on the NYT).  Depending on how aggressive the Feds want to be, this may be a first step in dealing with the problem, but they’ll need to go much farther.    The large number of homes that are collateral for sub-prime or defaulted mortgages either need to be sold to third parties, or the underlying loans worked out.  This is a massive undertaking requiring parties to create the market for these types of transactions.

                When the economic and political conditions are ripe, investors will come back to fund these new forms of work-out entities.  Pools of funds will be created to buy these portfolios at significant discounts.  Lawyers, investment banks, accountants, consultants, real estate brokers, title companies, escrow companies will be busy again.

                And perhaps, those were around in those days—15-20 years ago—will be in demand again, as the market looks for “experts” who’ve done this before.

                Maybe I should list my phone number.  It’ll be nice to supplement my income before my novel becomes a million seller.

2008-09-19 09:41:45 GMT
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