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: The Buck Stops Here

Economic Plan

By Stuart Buck, Esq.

Economist Arthur De Vany has an idea about how to price mortgage-backed securities: Pricing Mortgage Securities When Nobody Knows Anything* * * Designing option-like contracts lets you pay when you do know.It is easy to apply the Pay When You Know option principle to these distressed mortages and their derivatives. Let every holder of these instruments sell call options on their value. Make the options at least 5 years (preferably 10 years) before they expire so that they do not expire before there is time for a return of liquidity to the market. This would give time for the housing market to recover as well. The option would contain several strike points so that investors with different expectations, risk preferences, and current asset positions can choose to cash in at lower strike points for a quick return while others choose to wait for higher returns...continue to full post

Full post as published by The Buck Stops Here on September 27, 2008 (boomark / email).