So while the Bank of America was in the process of laying off 30,000 employees, borrowing $35 billion dollars from the taxpayers (still not paid back), it was also paying out $3.3 billion dollars in bonuses to the very people that led it into financial disaster (Bankers Reaped Lavish Bonuses During Bailouts, New York Times, July 31, 2009: A1).
That is unconscionable.
If each of those about-to-be-laid-off employees had been earning $100,000 per year, these bonuses would have kept all, yes all, of them in employment.
How top management and the board of directors could make that trade-off, I will never understand.
Sent to New York Times
Showing posts with label bailout. Show all posts
Showing posts with label bailout. Show all posts
Monday, August 3, 2009
Sunday, March 15, 2009
The Never-Ending Bailout
Throwing more money at AIG represents escalating commitment to a losing course of action (The Never-Ending Bailout, New York Times,March 3, 2009: A22).
The insurance contracts held by AIG are many multiples of the mortgages owed by homeowners, because many entities took out insurance policies on these basic mortgages and on the derivatives into which they were sliced. To bailout AIG will require much more money than the amount currently committed for bank bailouts.
We really need some new thinking in Washington.
If every mortgage has multiple derivatives associated with it, then the way to detoxify all these derivatives is to detoxify the underlying mortgage. The current attempt to write down mortgages is difficult to accomplish because all the owners of the mortgages and its derivatives have to agree on such a step.
The solution is to make the mortgages whole. This can simply be done through the government joining the stressed homeowner in a Shared Appreciation Mortgage based on the existing face value of the mortgage. For this only the homeowner and the government have to come to agreement. The mortgage holder and all the parties to the derivatives do not have to be involved because their income stream is unaffected. The homeowner pays what he or she can, the government picks up the balance. Going forward as the mortgage is paid down, both the homeowner and the government build up equity. When house prices recover and the house is sold, government and homeowner get their proportionate shares of the proceeds based upon their proportionate contributions.
The risk is that the government may face losses if house prices do not recover; but the government can continue to hold its mortgage if the house is sold at less than the value of the mortgage -- governments in this situation have infinite patience.
The Shared Appreciation Mortgage has several advantages: the mortgage and derivative holders are made whole; the mortgage holder does not have to go through the costs of foreclosure; and the neighborhood is not scarred by empty, foreclosed houses.
What are we waiting for?
The insurance contracts held by AIG are many multiples of the mortgages owed by homeowners, because many entities took out insurance policies on these basic mortgages and on the derivatives into which they were sliced. To bailout AIG will require much more money than the amount currently committed for bank bailouts.
We really need some new thinking in Washington.
If every mortgage has multiple derivatives associated with it, then the way to detoxify all these derivatives is to detoxify the underlying mortgage. The current attempt to write down mortgages is difficult to accomplish because all the owners of the mortgages and its derivatives have to agree on such a step.
The solution is to make the mortgages whole. This can simply be done through the government joining the stressed homeowner in a Shared Appreciation Mortgage based on the existing face value of the mortgage. For this only the homeowner and the government have to come to agreement. The mortgage holder and all the parties to the derivatives do not have to be involved because their income stream is unaffected. The homeowner pays what he or she can, the government picks up the balance. Going forward as the mortgage is paid down, both the homeowner and the government build up equity. When house prices recover and the house is sold, government and homeowner get their proportionate shares of the proceeds based upon their proportionate contributions.
The risk is that the government may face losses if house prices do not recover; but the government can continue to hold its mortgage if the house is sold at less than the value of the mortgage -- governments in this situation have infinite patience.
The Shared Appreciation Mortgage has several advantages: the mortgage and derivative holders are made whole; the mortgage holder does not have to go through the costs of foreclosure; and the neighborhood is not scarred by empty, foreclosed houses.
What are we waiting for?
Message to Regulators
Tyler Cowan's article on the bailout continues to focus simply on the problem of the banks (Message to Regulators: Bank Fix Needed Quickly, New York Times Business Section, March 1, 2009). He does not explore options that might make the banks whole and also help individual homeowners and their communities. The best option with this win-win characteristic would be the Shared Appreciation Mortgage (SAMs).
SAMs are the perfect instrument to bail out lenders, prevent foreclosures and restore confidence. In a SAM, a government agency would join with the distressed homeowner in meeting payments on the mortgage. There is no write-down so that lenders and derivative owners are made whole again. There is no foreclosure so that the individual homeowner stays in his home. There is no foreclosure so that neighborhoods are not hollowed out by a proliferation of empty homes.
There is risk to the government. As time goes by, the homeowner and the government build up equity in the home; the share of equity based on their proportionate contributions. There is however no guarantee that the total equity will exceed the homeowner's original purchase price before the house is eventually sold. In the best case scenario, both government and homeowner would recover their investments; in the worst case they would not. The risk of government losses might be reduced if the government part of the mortgage stayed with the house after an underwater sale, though that would reduce the attractiveness of the house to the new owner and consequently reduce the funds received by the seller. But this would work -- the government has infinite patience; early payoff is not a necessity.
Why don't we intensively discuss this solution, or something similar (as suggested by Andrew Caplin of New York University), as part of the recovery efforts that are being made?
SAMs are the perfect instrument to bail out lenders, prevent foreclosures and restore confidence. In a SAM, a government agency would join with the distressed homeowner in meeting payments on the mortgage. There is no write-down so that lenders and derivative owners are made whole again. There is no foreclosure so that the individual homeowner stays in his home. There is no foreclosure so that neighborhoods are not hollowed out by a proliferation of empty homes.
There is risk to the government. As time goes by, the homeowner and the government build up equity in the home; the share of equity based on their proportionate contributions. There is however no guarantee that the total equity will exceed the homeowner's original purchase price before the house is eventually sold. In the best case scenario, both government and homeowner would recover their investments; in the worst case they would not. The risk of government losses might be reduced if the government part of the mortgage stayed with the house after an underwater sale, though that would reduce the attractiveness of the house to the new owner and consequently reduce the funds received by the seller. But this would work -- the government has infinite patience; early payoff is not a necessity.
Why don't we intensively discuss this solution, or something similar (as suggested by Andrew Caplin of New York University), as part of the recovery efforts that are being made?
Subscribe to:
Posts (Atom)