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Coming Soon ... Securitization with a New ...

Coming Soon ... Securitization with a New, Improved (and Perhaps Safer) Face ...

For generations, the strength of the U.S. housing market was due, in part, to securitization of mortgages with guarantees from the government-sponsored companies, Fannie Mae and Freddie Mac. Following the savings and loan debacle of the late 1980s,
securitization -- which has been defined as "pooling and repackaging of cash-flow producing financial assets into securities that are then sold to investors" -- helped bring capital back to battered real estate markets.

Today, securitization of subprime real estate loans is blamed for the global liquidity crisis, but Wharton faculty say securitization itself is not at fault. Poor underwriting and other weaknesses in the market for mortgage-backed securities led to the current problems. Securitization, they say, will remain an important part of the way real estate ...

More attached. Someone will hopefully read this and give us the Cliff Notes version...


  • Wharton on Securitization 0408.pdf
    168.8 KB · Views: 15

doug reich

Some guy
Most of the article is old hat: bad risk models, securitization means a dash for trash, etc. The last section is the most interesting:

Wharton real estate professor Peter Linneman offers an intriguing prescription to bring prices down to
the point where the industry can start to rebuild. He suggests that the government tell banks that if they
want to maintain their federal insurance, they should fire their CEO by the end of the day, and the
government will pay the CEO $10 million in severance. Ousting the former CEOs gives the new bank
CEOs an incentive to write down all the bad assets immediately, so that any improvement will make
them look good going forward. That would speed the painful process of gradual price declines.

"There's plenty of money out there waiting for these assets to be written down to bargain prices," says
Linneman. In another quarter or two, the lenders would have new cash and be ready to lend again.
Meanwhile, he says, the government should tell bankers it will keep interest rates down but raise them
after the end of the year. "That says, 'Get your house in order in the next nine months because the
subsidy ends at the end of the year.'" Linneman figures that 1,000 CEOs are accountable for about 80%
of the current lending mess. If the government were to spend $10 billion to restore liquidity to the market
in nine months with only 1,000 people losing their jobs, it would be the best investment it could make to
restore the economy. "I'm only half-kidding," he quips.

Linneman also argues that concerns about moral hazard -- or the tendency to take greater risks because
of the presence of a safety net -- because of a bailout are not valid. Those concerns, he says, already exist
and have been in place since the U.S. government agreed to insure bank deposits. "The minute you say to
somebody, 'No matter what you do I'll give your people their money back,' you've created moral hazard,"
he says. "Now it's only a matter of how often and how much they will have to spend to settle up. If you
go through our history, every eight years to 15 years we have had an episode."
Ousting the former CEOs gives the new bank
CEOs an incentive to write down all the bad assets immediately

But what this CEO will do if such write down will bring bank's balance sheet bellow zero?

doug reich

Some guy
I was going to say something to that effect; it's a chicken-egg problem still. They need to raise cash before writing down the assets, but the price at which the new equity comes in would be selling the company, in effect.