As the nation watches, the politicians hunker down in Washington, trying to devise a master plan with a $700 billion price tag which would theoretically solve the financial crisis. Many views abound as to the appropriateness of the federal government to spend so much tax payer money to rescue the financial markets. Many in Congress insisted that any plan must limit executive compensation, give the tax payers a chance to make back their money, and provide for proper oversight.
As I blogged several days ago, in the early 1990’s the government formed the Resolution Trust Corporation to take the bad loans out of S&L’s (and closed them down), packaged the loans, and sold them in bulk. Those loans were remarketed, and after a few cycles, they reached the market where homebuyers were able to purchase the homes through auctions or other forms of sales.
Here are Twelve Questions, I’d like to pose to Congressional Leaders who are working on the plan:
1. Oversight is considered to be an important function—what organization within the government (or outside of government) has the qualifications to provide oversight over the process, keeping in mind that most of the individuals who have experience in this area until now (SEC, PCAOB, FRB, OTHEO, AICPA, Big 4 Auditors) were either directly or indirectly involved the failure of the system.
2. In the bail-out involving the RTC over 15 years ago, most of the mortgages at the time were not packaged to be securitized and then relentlessly divvied up into multiple pieces (tranches, as the experts like to say). Has Congress identified a way to gather every single piece of the loan instruments back into their original pieces, and if not, how will any deal work without all the pieces to the puzzle?
3. Assuming that Congress can collect all the pieces together, has anyone worked out the logistics of how these loans will be remarketed into the financial markets? Will they first be sold to a firm that will either foreclose on the properties or restructure the payment terms, or will there be an interim firm that will act as a “cushion” by buying the loans in bulk, and then taking action?
4. If an intermediary were to be involved, given that there are no more major Investment Banks surviving, who will the buyers be—Private Equity Funds, Sovereign Funds from the Mid-East and Asia, or are there other sources?
5. Will the Sales of the Loans be performed as bulk sales in sealed bid auctions, and if so, who will be running the auctions? Who will be preparing the packages necessary for investors to review the details and the qualities of the assets? Will these be the very same players (accountants, lawyers, bankers, investment bankers) who were involved in the problems?
6. Since these types of Funds typically require a return of 30% on their investments, will they be purchasing the assets at substantial discounts from whatever the Government is willing to pay to take the assets off the banks’ balance sheets?
7. The bail-out plan will presumably cover a few million mortgages (perhaps 3-4 million given an average value of $200,000 to $250,000). Who will be servicing the loans while the government is holding the assets, and will the servicers be looking at a new boss?
8. Many of the values of the underlying assets are substantially deteriorated, and there is not real mechanism to determine whether the $700 billion value is appropriate. Will the government send out appraisers to re-appraise every home, or conduct a massive ‘desk-top’ guestimation of values?
9. Appraisals of homes typically cost $300-$500 per home for a simple one page appraisal. If the loans are renegotiated, the terms will need to be modified and re-recorded, causing escrow and title fees. All the changes in documents will result in legal costs. Foreclosed homes will result in additional costs and fees, not to mention brokerage commissions when resold. Is it the goal of the government to pump money in these real-estate service sectors as part of the plan?
10. The greatest underlying issue coming from the housing crisis is uncertainty, which has led to the inability of organizations to make decisions. How exactly will decisions be made as to how assets will be disposed, and how will Congress ensure that any major decisions are made with proper authority, and what types of people will be hired to execute the plan?
11. The country is interested in a deal that makes sense for the majority, not just for a limited number of people or corporations. But the success of the plan often lies in the details. Placing blame is a non-starter, but hiring those who were involved in the mess also seems to be a problem. Can an executive who’s financial institution is being bailed out quit, start his own company and make millions? If we block tainted, but talented people, will there be enough people who can manage the bail-out?
12. Does this plan have to happen this week, or can it wait until after the election, or even until January?
There seem to be no easy solutions, but any solution must deal with the underlying housing crisis and the uncertainty that it has infused into the financial markets, not to mention Main Street, U.S.A.