McCain signs on with an idea that, at first glance, looks like the bad idea from Barney Frank I derided earlier this week.
We cannot wait any longer for more failures in our financial system. Structures like the resolution trust corporation that dealt with the failed savings and loan industry were designed to clean up the system and worked. Today we need a plan that doesn’t wait until the system fails. I am calling for the creation of the mortgage and financial institutions trust — the MFI. The priorities of this trust will be to work with the private sector and regulators to identify institutions that are weak and take remedies to strengthen them before they become insolvent. For troubled institutions this will provide an orderly process through which to identify bad loans and eventually sell them.
This will get the treasury and other financial regulatory authorities in a proactive position instead of reacting in a crisis mode to one situation after the other. The MFI will enhance investor and market confidence, benefit sound financial institutions, assist troubled institutions and protect our financial system, while minimizing taxpayer exposure. Tomorrow I will be talking in greater detail about the crisis facing our markets and what I will do as President to fix this crisis and get our economy moving again.
The Resolution Trust Corporation was a fine idea, and I’m not just saying that because close relatives worked for the institution. In it’s broadest outline, this government-created corporation went in and took over management of Savings and Loan banks that had effectively played roulette with depositors’ money. Those with greater economics and financial background can give much longer and detailed descriptions of what the RTC did, but basically, they managed these banks in as minimally-risky manner as possible, and sold off assets where they could. Another fascinating item about the RTC is that it was a government-created entity that accomplished its set goal and then disappeared, instead of hanging on in one form for another for generations…
McCain’s description of his plan is perfectly generic, but when he says, “provide an orderly process through which to identify bad loans and eventually sell them”, I think he means, sell them to the government, or to this government-created entity. The banks are only going to sell off the mortgages that are least likely to be paid back. So Uncle Sam, now part-owner of one of the world’s largest insurance companies, will also be on the hook for some as-yet-unknown amount of bad mortgages and homes.
I should note that some readers think “RTC 2.0″ is a swell idea. So far, it smells too much like a bailout to me, undermining McCain’s great comments about “moral hazard” yesterday.
UPDATE: One of my most astute readers, Aaron, cheers me a little:
We have two options here on this issue of an “RTC 2.0″ plan: Yes and no.
If the decision is “yes” on RTC2, This will be a huge positive for the market. Like it or not, a lot of economic discussions now are related to the stock market… and with RTC2, you can count on the reaction of the market just like August 2002 – a HUGE month for the market. That wouldn’t be a negative for McCain. At a minimum, no one would be talking about a market meltdown.
If the decision is “no” on RTC2, the market will suffer and will drag the doom onto Election Day… and this will give Obama an edge, no doubt about that. With the Democratic Congress and President Obama, RTC2 occurs in 2009 anyway.
So RTC2 is a moot point in many ways from a political sense, but for the markets, they want a signal that we’re going to get out of this mess. They don’t want all these weekend piecemeal surprises.
RTC 1.0 was profitable for the taxpayers… The key is where the government buys the papers..30 cents of the dollar, 20 cents of the dollar – a lot of these papers are marked as ZERO on the bank books because there are no bids on such things in the private market. If the banks are able to reverse the zero to a 30 cents of the dollar, the big capital crunch will immediately off the map… and you could only wish you buy CitiGroup at 13/share right now.
Moral hazard is a real issue..but if the market is dead, nothing else matters. Same with McCain vs Obama..with Obama – you can count on RTC2… and for McCain to win, he has to agree with RTC2.
In a similar vein… after Bear Stearns, Fannie and Freddie, and now AIG, is the “moral hazard” argument shot to pieces anyway?