If All Else Fails Listen to the Customer (read Taxpayer)

Behind my desk is a sign that states, "If all else fails, listen to the customer!" This was the result of having done many turn arounds in the 1980s. I saw many technical start ups with great products and no customers. The opposite was also true, there may be many customers and a poor product. Sooner or latter the customers disappear.

Rick Santelli of CNBC went on a rant yesterday regarding the administrations mortgage bail out plan. Then today Jared Bernstein, the economic advisor to VP Biden, rebuked Santelli and then proceeded to tout the great advantages of the Administrations program. Let one say that Santelli was resonating with more chords than Bernstein. In fact Bernstein presented himself with the arrogance of those in power, not one in the midst of a whirlwind.

Let me return to the problem again. The problem is that banks have junk on their books, junk because, despite the fact that is may have some value, no one believes it has any value. Thus there is no first mover and the markets are frozen. One Darwinian approach is to just let nature take it course. There are some problems here. The next is the recapitalize the banks. Equity is not the way to go because it is a balance sheet problem of junk on the balance sheet. It means removing the junk, remember the TARP.

The way to do it is as we have suggested weeks ago. Create a Federal Home Loan Bank, buy the junk at a haircut, who cares as long as it is above the current water level. Now everyone believes it is zero, so anything is better than nothing. Then move the mortgages to the FHLB and reissue them with certain covenants. However, issue them to vetted borrowers. Do not issue them to frauds, for there are many of them. Make real criminal indictments part of the issuance, namely if you lie to the FHLB you do hard time. Abject terror is frequently a strong motivation. This is one of the lessons learned from the Joe Stalin School of Management, after all I ran a business in Russia.

There will also be a strange phenomenon if one does this, namely, the bad borrowers just will not even apply, they will collapse on their own and then the DoJ should target them! The arrogance of a Jared Bernstein should be eliminated when seen against the backdrop of the motivated and spirited and justified Santelli mobs at the gate. Remember the Bastille.