Capitalism got us in here, Capitalism can get us out!
February 23, 2009
Mr. Tim Geithner
Secretary of the Treasury
C/o Department of the Treasury
1500 Pennsylvania Ave., NW
Washington, DC 20220
-Via fax: 202 -622-6415
Dear Mr. Geithner:
From down here in the trenches, I would like to propose a strategy to the housing and
debt crisis and perhaps the recession itself that involves NO government investment and
by design gets us out of this mess, as fast as possible The American Way!
A Contribution Not a Purchase and Sale
I suggest that we set u p a new entity to be managed by one or more of our citizens whose
reputations are still unscathed by recent events All the banks that own these toxic assets
then contribute them into the organization in exchange for unique ownership interests.
You as Treasury Secretary in conjunction with Mr. Bernanke over at the Federal Reserve
would see to it that the banks can use these securities of the LLC as collateral for
borrowing so they have access to cash to make new loans. This might help America. (see
Chart 1 )
These LLC interests would have a distribution rate equal (plus or minus) to the Federal
Funds target rate, this will allow the banks to borrow against them for “free.” What their
real yield or rate of return is will be determined over time.
Cash would accumulate to help the Total Return
The LLC would end up accumulating cash as the rate of interest on the toxic assets (the
vast majority of which are still paying) would be well in excess of the distribution rate.
Carryover of the Current Marks
The value of the LLC interests on the books of the contributing institution would be equal
to the marks that institution currently has on the contributed assets and would be frozen at
that level until such time as you, the Chairman of the Fed and the Manager(s) can come
to a consensus that true market value of the underlying assets can be determined and
hence a real value determined of the LLC interests.
Each of the institutions contributing toxic assets will likely have somewhat different
marks, that’s fine. They each get to use their own marks as the new value. Subsequently
if it’s found that the management of the contributing institution had the assets marked at
prices that are fraudulent, then the justice department can prosecute them under
Sarbanes/Oxley. But to equalize those marks, and keep one institution from profiting by
having different marks, the eventual return to each contributing institution based upon the
unique profit on its’ contributed assets, so one institution with lower marks will get more
money back from it’s investment in the LLC than an otherwise identical institution
The Manager would be in complete charge of running the business whose objective is
NOT to liquidate the portfolio (like RTC) but to manage it for total return and to return as
much as possible to the banks. This provision is to try to keep more foreclosures from
hitting the markets and further depressing the real estate markets. We need to put these
toxic assets in the hands of someone who can manage them long term and is not under
constant stress due to the marks and liquidity issues.
The Managers may decide to create a series of REITS, and sell off shares, or parse the
assets and sell off tracking shares to foreigners, perhaps even sell shares of the LLC (a
fungible ver sion) in the public markets. All manner of long term investors might be
interested in an un -leveraged portfolio of such assets. The Managers might also choose to
lever up the portfolio although I can’t see why that might help at this juncture.
Total Return Perspective not Short Term
The Managers must be well compensated so we get the “A” team. They earn fees by
managing the portfolio, not necessarily foreclosing but modifying the mortgages when it
makes sense from a “total return” perspective. I have outlined a possible compensation
scenario on Chart 2.
Not a “Good Bank/ Bad Bank” Plan
This is not a “good bank/bad bank” deal as I understand the term has been tossed around
up there. There would be no purchase and sale of the assets; instead they are contributed
to the new LLC. With the eventual return to the contributing bank depending on the real
value realized over a longer term not today’s “marks”.
This plan will make the Manager(s) of the LLC a lot of money, more if real estate values
stabilize, more if the rate of foreclosure slows down, more still if they manage the
portfolios well, this is the American way, one we haven’t seen in a while, but we can if
you execute on a plan like this. I believe it also puts time on the side of success (long
term view) instead of the mortal enemy of this process (trying to avoid re-marking the
assets down each time real estate prices tick down) Also it leverages the coupon on the
mortgages vs. the Federal Funds rate and turns that into a profit generator and also gives
these the banks access to more capital, via the faculties, I believe have already been setup
so they can make new loans.
Please create a Strategy that involves Capitalism !
Your people will come up with lots of things that need to be p olished in this simple plan,
as our leader in this matter, I ask you to tell them to treat the plan as one you came up
with and polish it accordingly.
Charles S. Stoll
CC: Bill Gross, Pimco
Warren Buffett, BKHT Omaha
Pres B .Obama, D.C.
PS: Mr. Secretary, don’t you think it’s time you called over to the SEC and quizzed them
about why they are not bringing back the up -tick rule? Something appears amiss.
PSS: In a couple of weeks my new book Your Lottery Gene, will be ready , it is all about
the affect of easy money on people whether it’s a winning lottery ticket, a inheritance or
just easy credit, I will send you a copy, but if you should want extra copies check it out
on my website wwww.combatbusinesswizard.com.
The opinions expressed in this letter are those of the author and do not reflect or represent
the opinions of Mutual Service Corporation or LPL Financial.