"The best effect is created when dancers achieve a smooth gliding motion in time to the music."
Blawgletter offers a two-part plan for ending the beginning of the credit market fiasco. The two steps will inject capital into the credit system — helping liquidity and pay-as-you-go solvency — and will also eliminate the horrifying overhang that $60-plus trillion in gambling debts has created.
Step, the first: Pay banks 100 cents on the dollar for, oh, $700 billion of the skunky bets they made on the real estate market. You know, those securitizations of dumb mortgages — including the subprime variety — that investment-cum-commercial banks put together (for a fee) and sold (at a profit) to gullible (as well as eyes-wide-open) investors.
But this jab doesn't come free of charge. It has a catch: If the feds lose when they unload the securities, in five or so years we'll have us what the corporate deal lawyers call a "true-up". Meaning that the bank-seller will have to make up the deficit at the end of the five-or-so year period.
In the event the government makes money, on the other hand, the profit goes to Joe Six-Pack taxpayer.
The buy-plus-true-up option (a) replaces a bad asset (the mortgage-back securities) with a good one (cash money) and (b) enhances the banks' liquidity but (c) keeps the banks on the hook for taxpayer losses.
The solution doesn't address balance sheet solvency — assets less liabilities — due to the future true-up obligation. (Although our accounting friends could conceivably find a way to finesse the issue.) But it does provide immediate solvency in the sense of ability to pay debts as they come due. That beats a poke in the eye with a sharp stick.
Step, the second: As we suggested before, Congress could declare null, void, and unlawful the credit default swap obligations that resulted from pure gambling. In the hands of speculators, who have no association with the underlying debt, the swaps represent a pristine wager that bad things will happen to the real estate projects that the debt financed.
Okay, the speculators won the bet. Big time. They stand to harvest trillions in profits. But letting them enforce the swaps would violate public policy, not least because of the extreme danger they posed then (and pose even more now) to the financial system.
Make the people who sold the swaps to speculators refund the premiums. Fine. But desperate times call for exercise of the government's full powers — especially if it will do more than anything else to resolve the single greatest threat to the credit market's solvency and stability. If it can be done lawfully — and surely those smart government lawyers can find a lawful way – void the swaps.
