Tuesday, September 30, 2008

Tainted Paper At The Bottom Of It All

Jerry Bower has neatly (and with some humor) summed up the current mess:

No wonder nobody wanted to hold politically tainted paper. Owning a mortgage-backed security in this environment is like owning a pointy hat and a black cat in colonial Massachusetts.
These securities, which the government invented (through Fannie Mae(nyse: FNM - news people )) and foisted upon the banks (through the Community Reinvestment Act), now has regulatory cooties. Own it and you'll get sued. Sell it and you'll get sued. Keep it and the regulators will force you to write it down to panic-level prices--and then you'll get sued. Try to foreclose and state and local government will refuse to enforce the contract. Try to get private equity investment to keep your balance sheet alive and you find the door barred by 80-year-out-of-date regulations like the Bank Holding Company Act.
Government did this to us. This plan isn't a bailout--it's more like reparations.
But still, maybe we can improve it. Perhaps the mark to market regulations could be suspended before the taxpayers are forced to move in. Maybe if some of these rules are eliminated, little or no taxpayer dollars will be needed. If Congress doesn't want to put public dollars into this, it should let private equity put private dollars in.
It's a silly throwback to the 1920s, which only allowed bank-holding companies to buy a majority investment in a troubled bank. Back then, all banks were local. Now banking is an international industry. Mutual funds, private individuals, hedge funds, venture capitalists, leprechauns, unicorns…everybody should be allowed to buy bank shares. If everybody is not allowed to, I'm afraid everybody will be forced to.
Before more coercion, maybe we could try a little more freedom. The plan's getting there but there's something missing. Needs a little more liberty bell.

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