steve crisp's blog

an open letter to the federal reserve board of governors, members of the united states congress, and the president of the united states

I once helped a woman who is an idiot salvage her life.

She let her automobile insurance expire because she could not afford it at the time it came up for renewal and then got pulled for having no auto insurance. She also had her tag recalled. Then she missed her court date. She lost her driver’s license as a result of that, then got pulled again, being charged with driving without a license, an expired tag, and no insurance. This time when she missed court again, she lost her license permanently.

Not a very good position for someone to be in who has five kids, all of whom are in school and relying on her ability to drive them, while also earning a living.

I decided to help her out with the problem, but the key to the solution was completely unraveling the whole situation starting at the beginning. First she purchased auto insurance and I persuaded a district attorney to go back and dismiss the original charge of driving with expired insurance. That negated the failure to appear which meant that her license should not have been suspended. And if her license was not suspended, then the second ticket for driving without a license, along with the second failure to appear and permanent loss of license was null and void as well. Once that was settled, she could then pay an administrative fee and regain her tag.

As charge after charge was dismissed, the entire situation began to unravel until she eventually was cleared of all charges and her license was legally restored. I fronted the attorney's costs and fees involved, and she paid me back over time on a schedule she could afford. Ultimately, the only expense I had was my time and the loss of interest on the money I fronted her.

I have since helped three other people do the same thing, unraveling a chain of events that began with one mistake – and a mistake that could have been easily corrected at the time – resulting in the negating of all that followed.

But again, the key to all that was negating the original mistake, forcing it back into its normal state as if nothing had happened.

The same solution holds true regarding the banking/mortgage/insurance crisis we are currently experiencing. And the key to unraveling it, placing it back into a state of normalcy, is to return to the original mistake and undo it.

That original mistake was the bundling of mortgages into derivative securities of varying financial nature and soundness, then selling those bonds to third parties. To unravel this mess, one entity needs to take ownership of those bonds such that the underlying mortgages can be put back together. Once that is accomplished, then the bonds are unraveled from the mortgages which can then be sold to investors at rates dependent on the stability of the actual mortgage itself. The bonds simply disappear.

As much as I detest the thought of the federal government nationalizing private businesses – no matter even if it is partially and temporarily – the feds are the only 800 pound gorilla with the financial and persuasive means to pull this unraveling off.

The feds buy all the bonds for literally pennies on the dollar. Investors in those bonds receive some value for them. If the purchase price of those bonds causes an investor bank to experience financial crisis, the feds either prop up that bank via the FDIC or force a sale to a bank that is stable. Any action of liquidy injection by the FDIC is recouped over time by increasing all banks payments into the system.

Once the bonds are in the possession of the government, then the varied insurance companies are off the hook in guaranteeing those bonds and other derivatives since they are now backed by the strength of the fed.

Then unravel the bonds from the mortgages and sell those mortgages as individual investments to whoever may wish to purchase them. Many, if not most, of them will be soundly producing vehicles, capable of receiving top dollar for their value, and the government will recoup a large amount of the money injected into this unraveling.

What will result are banks being stable once again with new regulations to prevent them offering mortgages to those incapable of paying them back. Insurance companies will be solvent with new regulations that they may only issue insurance on mortgages based on a single mortgage owned by a single homeowner. The purchasers of the bonds will take a financial hit, but if they are a bank, then at least their depositors are taken care of via FDIC or the forced merger of their bank with one that is sound. And the banks will subsequently be required under new regulations to properly vet those who they extend mortgages to in the future. Stock markets will respond by exploding upward again as the buyers and sellers of stock realize that this is all going to unravel and never happen again. The feds can even step in and reissue individual mortgages to those in default and facing foreclosure, allowing them a new start and a chance to stay in their homes.

There are only two parties who will get hurt by this.

First are those individuals who placed their money in high risk investments, i.e., those original bonds or companies which invested in those bonds. But such is the nature of high risk investment.

Secondly are those people upon whom ultimately this whole problem started – those who could never afford a mortgage, but who banks were forced to lend to in order to satisfy a Congressional demand to get people into their own homes. They will have to now rent, just as they have done since the beginning of the time when the first caveman who owned a spare cave decided to rent it out to someone else in exchange for mammoth meat.

And if anyone is concerned about what will happen to those people, then the government can offer huge tax advantages for builders (and investors in real estate development companies) to construct affordable apartments. That will spur the construction industry and increase jobs all over the country, the results of that boom spreading out into virtually all other sectors of the economy.

Start at the beginning, correcting the initial mistake, and the rest will unravel itself. I suspect it will ultimately cost the taxpayers far less in the long run than the trillions of dollars you folks are now talking about pumping into failed companies collapsing under failed ideas. And in the end, the government will have not one single equity stake in any private company, bank, insurance agency, or investment house.