07/19/2008 A lifesaver in the flood or stopping the snow from melting?

I would like to continue the blog posting by bringing up an old conversation I had with a once young, energetic and visionary CEO of a once high-flying mortgage lender whom we have been dealing with within the past two years. The initial introduction of SwapRent (SM) and HELM was made and proposed to them in July 2006. During the course of the past two years, upon first learning about the SwapRent (SM) methodology the CEO sent the following email to his board members and all his managers:

“I love this…I have toyed with this idea for awhile….in fact I mentioned it this week to a group of managers….swapping some equity upside in the home for a lower rate for a period of time. This would help people who have problems with ARM resets, people avoid foreclosure, and people who are first-time home buyers. If these guys have developed a derivative…let’s get on it and not “study it to death” like we did the ABX. Thanks.”

Studying it to death was in fact what the staff managers did afterwards. But before they went belly up during the last few days of their existence I had a following email exchange with the CEO.

“Ralph, ….. We have our hands full fighting this crisis. … We are filling sandbags and plugging the serious leaks in our dam that we need to plug for immediate survival and you have stopped by and are telling us that you have something better to fill those bags than sand or how to build a better dam. ”

And my response was: “…. I may not be able to help you with another sandbag but I could certainly help you stop the torrents by stopping the snow from melting. Others see that you have the power to do so now may give you more sandbags that you’ll need for a survival.” No action was taken by them. The firm succumbed to the short sellers’ judgement and power a few months later.

This was very typical of our many experiences dealing with banks, mortgage lenders and Wall Street firms during our effort to introduce the SwapRent (SM) methodology and the related consumer financial products within the past few years.

Now that the entire Wall Street and financial markets are scrambling to fight for survival, people tend to lose track and not realize the fact that if no effort is made to stop or slow the snow from melting upstream at the mountain top, efforts to fight the flood could prove to be futile at best, Those who could manage to get a lifesaver would be those who have more than just the capital needed to survive for today but also a managerial will to adopt new innovative solutions to stop the root cause of the problems and to build a brighter new world tomorrow.

For the time being the federal government has timely opened up its own backyard to let the flood in so that the remaining private sector financial institutions may not all be drowned. If the federal government like these banks and mortgage lenders before them spends all its time worrying and fighting the downstream flood problems, yields to legislator politicians’ demand to waste tax-payer’s money and time to build more unnecessary downstream dams and levees, it may repeat the same mistakes as the banks had done before it.

Meanwhile maybe all we needed all along was simply to focus on stopping or at least slowing the snow from melting upstream at the mountain top. All these downstream flood problems might not even have been systemic life threatening problems if the upstream snow melting problem had been addressed and properly dealt with in a timely manner.

What started out may be just a simple mortgage default and foreclosure problem. Nobody had the incentives and responsibility to fix it so people started to blame it on securitization. The federal and local governments thought it was a private sector problem and stayed on the sideline for the private sector to sort it out. Economist pundits said it was a good correction that the bubble burst and it would be a good self-cleansing mechanism. It subsequently triggered the too big to fail issue. Taxpayer’s money was used to bail out the situation, so people started pointing fingers and blame it on derivatives again. When our capitalism financial system finally collapses then people will say, see, I told you that capitalism will not work in the long run. Now the favorite quote of the day is that the Wall Street greed has privatized all the upside gains and American taxpayer’s money was used to socialize all the downside risks. Irresponsible people who say that usually has nothing else creative or productive to offer other than making a demagoguery comment.

Maybe instead of spending time making all these hindsight comments we should re-focus our national efforts to get some really creative effective measures taken and implemented soon to stem the mortgages defaults and foreclosures? If not, in another few months time it may be the US federal government itself, not just Morgan Stanley who will ask CIC to take them over next. Will the Chinese, the Russians and the Saudi Arabians inevitably be the one who will own the US federal government in a debt for equity swap deal in the near future? You can only ask other people to take on so much of your debt until they will eventually wake up and ask “When will this stop?” Maybe the SwapRent (SM) contract could be the financial means for them to own a piece of America instead of continuing to own only Americans’ debts? Letting them be the economic landlords could be just one of the really viable solutions to bring fresh money into the American society to stop the snow from melting further.

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