A Better Way To Revive Credit Markets, Robert Aliber, FT

The chatter that the American taxpayers will pay $700bn to save the banks is nonsense. I have a straightforward plan that should revive the market in mortgage-related securities (MRS), greatly enhance bank capital and earn several tens of billions of dollars for the US Treasury.

The distress in the US credit market reflects that MRS are no longer priced on a rational basis. Rather, a few companies with a desperate need for cash have sold these securities for 25 cents on the dollar; the accounting conventions require that this price is used to value similar securities owned by other banks.

There are 40m mortgages on residential real estate in the US. Ninety seven per cent or 98 per cent of homeowners make their mortgage payments on a timely basis. The median home price in the US is $250,000. Assume 1m homeowners are subject to foreclosure and that the lenders incur a loss of $100,000 each time a borrower defaults. The losses to the lenders then would total $100bn. If 4 per cent of the homeowners with mortgages default, the losses to the lenders would total about $150bn.

The ownership of these MRS is concentrated; 20 US banks have 80 per cent of the mortgage-related securities that are not owned in Europe and Asia.

More

Credit: No Easy Answers,, Felix Salmon, Market Movers

Robert Aliber has a peculiar op-ed in the FT, presenting a TARP plan "that should revive the market in mortgage-related securities, greatly enhance bank capital and earn several tens of billions of dollars for the US Treasury". It's peculiar because just as the world and Hank Paulson is finally coming around to the fact that US banks are facing a solvency crisis rather than a liquidity crisis, Aliber still uses the kind of back-of-the-envelope calculations we saw a lot of in early 2007 to assert that there's no solvency crisis at all.

...

Using this reasoning as a starting point, Aliber then proceeds to come up with a clever plan for essentially monetizing the difference between the $350 billion that banks have written off and the $150 billion that they will eventually lose.

But if you really think that US banks will ultimately suffer no more than $150 billion in mortgage-related losses, I've got a triple-A-rated super-senior collateralized Brooklyn Bridge obligation to sell you. The reason banks aren't lending to each other is that they're convinced the final losses will be much bigger than the ones already taken, rather than much smaller. (Although, in a piece of good news, the TED spread is now back down to less than 400bp this morning. I doubt that means banks are lending to each other yet, but it's definitely a move in the right direction.)

More