While Obama’s team desperately cooks up one flawed plan after another to save the banking and housing systems, it’s worth noting that the private market is already doing it.
The private market’s solution does all the things the government wants its bailouts to do:
- It keeps homeowners in their homes
- It gets crap assets off bank balance sheets
- It gets money flowing through the economy again.
The private market’s solution also has several advantages that the government’s bailouts do not:
- It is morally fair
- It doesn’t blow hundreds of billions of taxpayer dollars
- It recognises and accepts the banks’ massive losses
- It removes the need for the government to micromanage zombie banks
- It places the responsibility and pain of those losses on the ones who should bear them: The people who made the dumb-arse loans in the first place.
- It doesn’t so infuriate the Great Unbailed-Out Majority that everyone hates everybody.
What is this miraculous solution that has so far eluded the best and the brightest in two presidential administrations?
- The government does what it is supposed to do: Seize, restructure, and sell off insolvent banks.
- The private sector does what it is supposed to do: Direct capital toward promising opportunities.
Today’s example: PennyMac.
PennyMac was started by Stanford Kurland, the No. 2 at Countrywide. (Leave that irony aside for a moment). PennyMac buys up mortgages that were previously held by failed banks like IndyMac. It buys them at, say, 30 cents on the dollar.
PennyMac then calls up the homeowner paying the mortgage who is about to be evicted, “How would you like a 50% cut in your mortgage payment?” The overjoyed homeowner gets to keep his house. PennyMac and its shareholders feast on the spread between 30 cents and 50 cents.
And who gets hosed?
The shareholders and bondholders of IndyMac. As they should. Because they were the ones who made the dumb decisions to invest in and lend money to IndyMac in the first place.
And where did PennyMac get the money to buy those IndyMac assets? In this case, from Blackstone. A private-market investor. But it doesn’t really matter where PennyMac’s particular money came from–because there are dozens of Blackstones waiting on the sidelines to invest in dozens of other PennyMacs. Why? Because, unlike Shitigroup and our other legacy albatrosses, PennyMacs are good investments.
(And if, by some miracle, Tim Geithner proves to be right about this also being a liquidity crisis and NO private market investors have money to invest in PennyMacs, then maybe the taxpayers can actually be put into a good investment for once).
Yes, it’s that simple.
There is most definitely a role for government in the banking and housing crises: The FDIC needs to keep forcing banks to mark their assets to market, seize the ones that are insolvent, and sell off their assets to companies like PennyMac. That has been the government’s job all along. It just needs to keep doing it, and the system will work.