Finally, the folks over at Treasury have figured out how to fix what is ailing the credit markets- set up a special purpose vehicle to buy good, but hard to sell assets.
It will be interesting to see how they set this up- the early read perhaps isn't promising :"a new entity might purchase assets at a steep discount from solvent financial institutions and eventually sell them back into the market."
So, what good is that? And how long would a company hold this asset for?
Here is what they should do:
Set up a GSE much like Fannie & Freddie before Hank took them over. Private, because you want an element of for profit to maximize efficiency. This new GSE is authorized to issue one first round of long term bonds. Perhaps there is a guaranteed rate of return, perhaps they can be tax free. Now, this first round is large- say $500 Billion.
And now, they buy mortgage related paper, paying a 'fair' value, not 'market' value. And I think this is certainly problematic, but I believe you would have to get down to the loan level on every deal. No doubt, this new GSE would employ a lot of out of work mortgage bankers and investment bankers.
Fair value, because this new GSE would not need to sell- they could hold to maturity. And, if they foreclose, and the value is less than the amount owed, perhaps they could own & rent out the property until the value of the property returned.
A lot of perhaps. But, in any RTC Bailout style effort, they need to address one of the problems: lack of confidence. Yes, some mortgages have gone bad because the borrowers were over streatched, and the property value was pushed out due to easy money. But that isn't every mortgage- and that is the problem with the market right now