KISS

Keep It Simple Stupid ...

In attempting to think through the idea of having the treasury actually pay the missing P&I payments on the mortgages that provided collateral to the defaulted MBS, I have come up with the following:

So far, the treasury has purchased about $158 billion in preferred stock with warrants in a bunch of US financial institutions. I calculated the future value of that number using a 6% fixed rate payment and 1/360 of the $158 billion as a monthly payment (hey, I know that the formula is wrong, but bear with me). The FV comes out to almost $513 billion. What this says is, that if the treasury just put the $158 billion aside and re-invested it someplace like the treasury yield curve, e.g. guess at the cash flow needed to amortize the mortgage pool and then buy a strip of government securities in an equal amount, it would have more than enough cash to pay monthly P&I. I would guess, that $440 million (158 billion/360) is a tad more than what is needed to get the cash flow running in all of the defaulted MBS. In other words, my formula is close enough for government work.

Remember folks, the big issue for AIG, as an example, is credit default swaps. That is, AIG was the counter party on swaps that, kind of, insured the credit worthiness of a bunch of equity tranches of MBS issued by the Street. CDS's made it possible for the Street to leverage the equity in these deals which, in the event of a default, compounds the problem by some really big factor. So big, in fact, that Lehman, Merrill and Bear Stearns have ceased to exist and a number of other firms have gotten their heads handed to them. So, in my last post I suggested that paying the P&I payments for the referenced securities in the swaps would restore their credit ratings. If the securities are, once again, AAA, then the problem goes away, does it not? Further, if the MBS has cash flow, it can be used as collateral and liquidity will be restored to the system.

I suppose it's really wishful thinking for me to expect that anyone who can actually do anything about this mess will ever read this blog. Or is it?

One last thought - before the first CMO was issued, the barrier that was put in front of the idea most often was, "if this is such a good idea, how come nobody has dome it?" I mention this, because I really don't think that the mindset of most folks in the system has changed in the last 25 years. That is, there is very little in the way of creativity. The Street is good at copying other people's ideas, which probably has a lot to do with the reasons why this mess happened in the first place. The point is, when one copies another persons idea, the copier usually doesn't understand the original idea. They just do it and what is good for the goose is good for the gander in the realm of getting approval to do anything that one's competitor is doing in the Street.
Remember, all of the firms know what all of the others are doing. When one is making tons of money, they ALL want to get in on the game. My original premise when writing this blog was, that managers in the street did not know the risk in this junk. But, they needed profits to keep their bonuses as high as the competition and here we are.