Sunday, January 06, 2008

Was there ever any doubt?

Council on Foreign Relations calling for the US taxpayer to pick up the tab for all defaulted subprime mortgages, ala the S&L bailout of the 80s. Guess I wasn't paying attention a couple of weeks ago, but better late than never.

Root Out Bad Debt or More Pain Will Follow
Authors: Mark Fisch, Benn Steil, Senior Fellow and Director of International Economics December 21, 2007 Financial Times

...We believe that what is needed is a new Resolution Trust Corporation based on the 1989 model that cleaned up the S&L mess. Congress would establish this new RTC to buy up subprime mortgages at deep discounts. The RTC would establish, say, five tiers of mortgage, offering, say, 70 cents in the dollar for tier A, 60 cents for tier B, 50 cents for tier C, and so on. Sellers would have to pay the RTC a fee for evaluating and classifying any mortgages they wished to sell.

How much would such a scheme cost the US taxpayer? In the worst case, in which house prices continued to fall steeply, and in which these free options to sell were very widely exercised, the bill would be some fraction, say up to a quarter, of the total subprime write-off—about $75bn. The silver lining—nay, platinum—would be the relatively rapid revival of the global credit system, the oxygen of the world economy.

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