Prof. Krugman VS Tim Geithner, To Whom will be right (part II).
To my personal, humble opinion, the key parts of Legacy Loan and Legacy Security of Geithner’s Public-Private Investment Program (PPIP) have the following critical points:
1. They are not zero-sum games, the Bank, Public, and Private investors they can be win, win, win situation at best. There will be no loss, loss, loss for Bank, Public and Private investors at worst situation. In game theory, the two legacy programs provide incentives for the participants, the most interesting part; there has a chance for win, win, win. For every party, it is worth to bet.
2. The two legacy programs all heavy correlate with the price of housing.
3. The housing price can be lower and higher in the future, however, house even in foreclosure has a price. That means the assets in either Legacy Loan or Legacy Security all has value, it never has zero value!
4. In residential mortgage loan, most rated AAA loan, 80% house owner still paying the mortgage. That is why Geithner did not use the word “Toxic” instead of “Legacy” in his plan.
Now let me get a bit of detail of the Legacy Loan plan only:
Sample Investment Under the Legacy Loans Program
Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.
Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.
Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.
Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.
Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.
Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis — using asset managers approved and subject to oversight by the FDIC. (Quoted from Treasury white paper)
You can see that that is why big Wall Street firms like Blackrock, Blackstone, Pimco they all excited about that. You just invest around $7 dollars, and you can control and manage a $100 worth asset. The most important part the Bank can sell the Legacy loan!
In the future, if the estate market goes up or the Obama housing plan works or the “FOREIGNERS WHO BUY HOUSE CAN GET MULTIPLE US RE-ENTRY VISA AND TURN TO GREEN CARD” plan to be implemented in some foreclosure states, I am so sure will stabalize the housing market and reduce the rate of foreclosure. Then, win, win, and win the best situation for Bank, Public, and Private will appear. (Jimmy Huntington is the first one to lay up this plan in Bigthink on Jan 12, 2009, in his article “Creative Ideas That May Contribute The Success of Obama’s central planning”. His suggestion: Special visa issued for foreigner, who can invest in the house market. For example, any one can afford to invest at least US$300,000, with a pass in security check; he or she can get a special visa to visit US multiple times within 5 yrs. After five year if she or he passes the security, they got the Green Card. If investors do not want the green card, they can still use the special visa another five year and keep the Green Card status, until they sell the house. It is a better plan than WSJ reported in Op-ed “Immigrants can help fix the housing bubble” by Richard LeFrak and Gary Shilling in March 17, 2009)
Last but not least, even Geithner’s PPIP works, it does not means we can be 100% sure getting through this recession. We need jobs creations and the long term industrial innovation accompany Geithner’s PPIP to succeed.
Is this kind of analysis is better than Prof. Krugman ‘s too early prediction: It almost surely will fail? I present, you decide!
OH! One more wish! I wish Porf. Krugman, his Colleagues and staff of New York Times could figure out a plan which helps NYJ get through its recession or may be depression. If they are really smart enough and able enough! Can they?
PS: I hate to see Rupert Murdoch’s WSJ can even figure out a way to home deliver its newspaper to rural area, that NYT CANNOT! That worries me, in NYT almost every day it seems to me that the Columnists, in NYT write articles that aim at teaching other how to save the world. In realty they can not save my beloved (may be not his!) NYT from depression! How can make me believe their writing?