A Modest Proposal for Fixing America
What I learned in the S&L crisis that could revive our housing market
What to make of the bailouts? There is a justifiable public outcry when taxpayer money is used to bail out banks and brokerages that made leveraged-to-the-eyeballs risky investments. Instead of complaining and feeling hopeless about our government placing future generations into a mild form of indentured servitude, here's a modest proposal to more equitably share the risks and rewards in a democratic way which will please politicians and their constituents alike.
First, let's boil down what is happening: Essentially, the government is taking over defunct banks with billions of bad loans on their books, and then selling them when they can for whatever they can get, while often guaranteeing the buyer receives 90% of the loan portfolio. On a smaller scale, they did this during the S&L crisis about twenty years ago, without the taxpayer guarantee.
A bit of personal history for perspective: During the S&L crisis in the early '90s I attended a government auction and tried to participate. Mortgage loans were bundled and sold in $10 million lots. A roomful of bankers and brokers bid for them. They sold for about 60 cents on the dollar. One lot contained a loan secured by a house I owned, so I asked the government auctioneers if they would break my loan out of that lot and let me bid. They refused. So I watched my loan change hands at 66 cents on the dollar, while I was still obligated to pay 100 cents on the dollar. I approached the successful bidder, Dean Witter, and got his card. I called him to ask if I could buy my loan for 80 cents. He refused. He sold it for 75 cents to a bank in Texas. I called them and offered 90 cents. He refused. He sold it for 85 cents to another bank. So I got the message. Theirs was a closed club of bankers, and I, as a simple serf of the taxpaying public, was not a member.
So my modest proposal is this: Use the free market to distribute rewards and risks on a scale where taxpaying citizens can voluntarily participate on a level with other bidders. In the upcoming auctions, sell the loans individually at public auctions. Let borrowers bid on their own loans. Let the public bid on them with their IRA money, if they so choose. In other words, share the possible profits with the taxpaying citizens in a form of democratic debt relief. Perhaps an investor will buy a loan for 65 cents, and sell it to the borrower for 75 cents. Investor makes a profit. Borrower receives some relief. This will stimulate the economy tremendously from the grass roots up in a true, free-market fashion. This will revive the housing market, which Bernanke has repeatedly said is key to the crisis solution. This will restore citizens’ faith in government, allow the free market to establish values, and move these troubled assets off the government’s books.
Eighteen years ago the Resolution Trust Corporation argued with me that it was too much paperwork to sell the loans individually. The internet has changed everything. Now, it would be easy to publish all the loan details, and conduct online auctions. More exposure means better bids. Everyone wins. Except of course the old bankers club that profited in the previous cycle, and which caused this crisis in the first place. Otherwise, if this is not done, this time it will be foreign sovereign funds coming in to bid, and American homeowners will spend the rest of their lives making monthly payments to Beijing or Abu Dhabi.
According to the FDIC website, the rules of the "club" this time are the same as in the S&L FDIC sales I wrote of above: $500 annual fee, $50,000 deposit and "previous loan-buying experience" to even see what loans are for sale. Banks, by the way, don't have to pay these fees. So the taxpaying citizen is once again excluded from the "club", for the further enrichment of the bankers.
From 1985 through 2000 I owned and operated a successful company which originated, serviced and wound up mortgage loans. I experienced the S&L crisis. I propose a test to implement my fair and balanced idea to resolve the current real estate crisis as follows: With a small loan portfolio of $100 million face value, we will sell it on a low-profile basis. This could be done in the next nine months. Afterwards, evaluate the test, and use the results to proceed accordingly.