Academic

Eric Posner on the Upside of Aggregation

By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring

Eric Posner makes a nice point about the unsaleability of toxic assets:

It's a reminder that one contribution to the freezing up of the MBS market is regulation, specifically capital adequacy regulation - or at least it is if banks don't have to mark hard-to-sell MBS to market to meet their capital requirements.  I presume that some combination of those requirements and other accounting principles about when you'd have to recognize a loss are, at least, not helping matters.

Posner also notes that one advantage of the proposed government takeover of these securities is that the transaction cost problem, whereby the multifarious holders of MBS are hard to put together in unanimous agreement that the underlying mortgages should be modified, which would impact their expected payment stream, is solved.

I agree that substituting the government for all these owners would solve that problem (as would, by the way, Barney Frank's TARP-2, which would unilaterally modify all those loans).  Does this mean that the Aggregator Bank is a good thing?

Maybe, but I'm not sure how the valuation problem is avoided.  For the government has to purchase to assets in its Aggregator Bank from the bank, and then we are back in the rabbit hole of "what are they worth?"

In old English property cases, people sometimes left their personal property with a bailee, who owed a duty of care to the owner of the goods being held.  Perhaps what is needed is a government conservatorship of the toxic assets, held and modifiable by the US, but owned, and eventually returned, to the banks.

Full post as published by Conglomerate on January 20, 2009 (boomark / email).