"Bad Bank"- How to Mitigate the Losses
Politics / Credit Crisis Bailouts Jan 31, 2009 - 12:47 PM GMTBy: Submissions
Under the "Bad Bank" scenario, the taxpayers will own these Troubled Assets which are comprised of "Toxic" mortgages.
In effect, the US government (taxpayers) will be bearing the loss on these “toxic” mortgages. The growing concern is that these losses will continue to materialize as defaults increase with the projected 8 million foreclosures expected over the next four years. It seems that the key to this crisis IS THE BORROWER!
The underlying “troubled assets” are the “toxic” mortgages such as Alt-A, Option ARMs, Interest-Only, etc. that are interwoven into the Mortgage Backed Securities, Collateral Debt Obligations, and other derivative investments that are leveraged into investments valued in the trillions of dollars worldwide.
Since the valuation of these “toxic” assets depends on the Borrower’s ability to make the monthly mortgage payments, the key to a solution of this Economic Crisis is the Borrower!
Everyone is betting that the Borrower will default and foreclosures will follow. The high rate of foreclosure should have been expected because the Borrower has no concept of managing money and is like a "Boat without a Paddle".
The Borrower is in desperate need of "Financial Guidance" in this complex economic environment that requires "informed" financial decision-making. The Subprime Mortgage Crisis, out-of-control consumer spending and credit card usage, and the spike in foreclosures and bankruptcies provide evidence of that fact. Loan modification or "Bailout" will not work. Even after loan modification, the re-default rate was 60% within 6 months!
The solution is a program of Immediate and Specific Financial Guidance that will help the Borrower "naturally" be able to make the monthly mortgage payment, without "bailout" or extensive loan modifications which have proven to be a failure. This program is NOT the so-called Financial Literacy initiative that simply disseminates "information", but rather it is a program that will help the Borrower "understand" how to manage money and avoid the pitfalls that have previously caused financial
distress.
Borrowers, both small business and individual, require Immediate and Specific Financial Guidance in order to avoid default and foreclosure. As the Borrower is successfully guided to avoid default, the financial and housing markets will respond favorably. The result will be a reversal of the downward trend in the valuation of the “troubled assets”.
If we are successful, we can turn this crisis “all around” and stimulate the economy “naturally” rather than by “bailout” which does not guarantee success.
Instead of the expected losses, the US government (taxpayers) will benefit from the unexpected gains that will result as these investments grow in value.
Samuel D. Bornstein
Professor of Accounting & Taxation
Kean University, School of Business, Union, NJ
Tel: (732) 493 - 4799
Email: bornsteinsong@aol.com
© 2009 Copyright Samuel D. Bornstein - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.
