I have been in contact all last week and over the weekend with a very important person in finance (manages over 100 billion). There were some terse exchanges but he asked me what I would do. I wrote an email and he forwarded it onto Washington. I had no idea he was going to do that and would have changed some of it if I would have known. I realize none of this stuff will be implemented but it was cool it made its way to Washington. Below is the exchange. You should probably read my email first at the bottom.
Email to me and XXX
Thanks Jason.
XXX- I'm not sure if you are checking this email account right now, but if you are these are ideas from a young hedge fund manager with what I would refer to as simple common sense. Sometimes we all get too close to the issue and it helps to get a truly independent view, from someone who is operating alone, and away from the crowd. There are some interesting ideas in here. It's light reading so take a second and take a look.
Since you've gone to Washington, all "hell" has broken lose. Did you know what you were getting in to. Either way, I'm glad you are there working for all of us.
Jason, XXXX is a special assistant to Sec. Paulson. Don't contact him directly.
Hope all is well with both of you.
All the best.
XXXX
My original email
First my apologies for the previous email. It was an emotional reaction as I see my industry being destroyed.
Below I describe 11 steps of what I would do now if I had absolute power. There is no perfect answer. The commercial real estate blow up is going to be a 2009 story and the corporate bank debt blow up is going to be a 2009 - 2011 story. We are headed for depression. This may give us a fighting chance to avoid that.
The primary problem is that A + B = A +B. It does not equal A + B + C. Investment bankers constantly try to convince you that it equals A + B + C, that was the whole CDO scam. I believe the entire U.S. banking system is insolvent. You cannot somehow deal with that and magically create value.
1) Have Hank Paulson, Ben Bernanke, John Mack, your calpers counterpart, and others stand at a chalk board and write "there are real problems in the U.S. economy and it is not short sellers" 10 times. They have got to recognize the issue.
2) Declare a 7 day investment bank holiday where every investment banker in America works for Paulson and Bernanke for free.
3) Identify 1,000,000 homes in America that are for sale or in foreclosure the government can buy at market prices. Assuming $200,000 per home that costs 200 billion. Bulldoze them and pass a law that mandates the lots be sold over a 5 year period 10 years from now. Put a law in place that to reverse this sale has to be approved by 2/3 of Congress
4) Examine every bank in the United States and mark every asset to current market prices. EVERY ASSET. Take the bottom 1000 banks (they will be insolvent) wipe out the equity, merge them with a good bank and take whatever assets need to be taken by an RTC structure of the government.
5) Take the second thousand banks and take the junk assets off the balance sheet at market prices. Make these 1000 banks sell preferred stock to the government in return.
6) Merge Goldman and Morgan Stanley with Wachovia or Washington Mutual taking what bad assets needed to by the RTC. All 3 above will probably cost between $400 and $800 billion.
7) Identify $500 billion in government programs you can cancel to try to save the dollar
8) Establish extensive regulatory oversight over the CDS market.
9) Backstop the entire money market industry for 6 months. Not this little 50 billion sham thing they came up with.
10) Cut interest rates to 1%. This needs to be reversed quickly if it becomes obvious that the market has stabilized.
11) Remove the short selling rule and pass a law that would require Congress to vote by a 2/3 majority for any such short ban again. That will restore confidence that the market will be a market.
Like I said this won't solve everything. It will go along way to helping. You have to a functioning banking system. Ours is insolvent. Not short sellers made problems, insolvent.
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2 comments:
I would add something more specific that nobody seems to be talking about. How about we define the necessary loan documentation and programs for home loans to ensure that a statistically respectable amount of people can actually pay their debts even with 20% swings in house values?
It seems to me that we are trying to fix the market, without working on what got us into this mess in the first place. The underlying issue was that the government created programs and allowed banks to make money on loans that didn't make sense. The government, through the Community Reinvestment Act, forced FDIC insured banks to invest in many bad loans. At the same time, mortgage underwriters found new ways of stupidity to get loans closed only to sell them off and get the risk off their books (now this appears it was short-sighted).
Right now, if the home loans got moving again, the same mortgage underwriters, house appraisers and realtors will continue to collude to get people loans when they can't pay them unless the markets refuse the bad loans. Even if they don't accept them at first, if the government doesn't create laws, it will happen again eventually.
It will happen again any way even if you do pass new laws. Nothing is new under the sun. Everything looks similar to something before. It will have different names or be pitched differently. Your right of course in your assessment but you could change it around and apply to the S&L crises, the roaring 20s leading into the Depression, even the South Seas Bubble. Different names but history is continually telling the same old story.
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