Role and Purpose of Taxpayer Bank Hard Asset Managers

June 16, 2009
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On the Nature & Philosophy of Financial Instability and Application to the Current Financial Crisis Part IV

Role and Purpose of Taxpayer Bank Hard Asset Managers

By Julian Sanchez, PhD

Read: Circuit Systems and our Financial Crisis – Part I
Read: Functions of Taxpayer Bank and the Market – Part II
Read: The Pros and Cons of a Taxpayer Bank – Part III

The Hard Asset Manager:

Hard assets must be treated differently since they affect supply and demand in a given local market. If you release these assets too quickly, you can accentuate the problem making it worse for the banks. The Hard Asset Manager must work with suppliers for controlled release of assets. In the case of houses, the major suppliers are the homebui lders. The Hard Asset Manager should work with homebuilders to establish a release program so that both the government and the homebuilders can establish the supply each are contributing to the market. The Hard Asset Manager has a dual role, to maximize the return for the taxpayer and to stabilize home prices. The number of homes in many markets can reach a critical mass, resulting in a downward spiral of home prices. If the downward spiral is not stopped, it will jeopardize the stability of banks and their capital structure, which will reinforce the slide in home prices. Therefore, the Hard Asset Manger should not only seek returns for the taxpayer but also balance this with stability of the markets by:

1. Writing down the loan and interest for viable homeowners. They should lower the mortgage and interest sufficiently so that the homeowner can contribute to the local economy, continue paying their taxes, and reduce the inventory of government homes. The key to a successful loan modification program is to ensure negative equity is eliminated2. Without eliminating20negative equity there is a high probability the loan will default again and the deflationary spiral continue. The details of how to implement such a plan with the ability of the government to recover its investment is discussed by Jack Guttentag3. Once these loans have been fixed, they can be added to the loan portfolios of banks that have been nationalized and repaired and the government can then sell stakes in these banks back to the public. These loans can be traded to MBS portfolios to unwind and repair bad loan portfolios. The government can also hold them to maturity to recover their investment and stabilize the housing market, attracting both foreign and out of state investors with government incentives. This is important in the hard hit states of FL, CA, AZ, NV, OH, and MI. Most of these states have high population growth, which can be used to reduce the government’s inventory of homes. These high growth states will eventually absorb the homes with a high probability the government will earn a significant profit.
2. Renting homes by first filling government sponsored rental programs such as Section 8, then going to out-of-state investors and finally the public in the local market. The government’s need to manage these assets can be done though capable asset/property management companies. These asset/property manager companies will hire maintenance, management and service personnel to maintain the inventory of government owned property, which will increase employment in areas hardest hit.
3. Selling mobile assets, such as autos, in a controlled release to the local market or in other states or foreign markets where demand exists. Prudence should be used when releasing these assets into the local market since it would be unwise to disrupt local supply/demand structure.
4. Moving assets to viable sub-divisions or other locations to restore balance.
5. In the extreme, bulldozing down the sub-division, as was done in the Houston market followin g the oil market collapse, and recycling the material.
6. Contemplating new ideas to restore equilibrium to local markets.

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