Daily Briefing Weekend Edition

Questions Remain on Plan

By Paul Muolo

As the government pulled together its $700 billion plan to bail out the credit markets last week, two central questions remained for mortgage bankers: at what price would the Treasury buy distressed assets and who, exactly, would be the market maker? "There's plenty of people out there with cash ready to buy," said one investment banker who runs a small boutique Wall Street shop. "But if they offer the Treasury only 45 cents [on the dollar], what's the government going to do?"

He added, "Will the government buy at more than market - to help out the seller? How's that going to go over with the public?"

For now, Treasury appears to be leaning toward a strategy of buying subprime-related mortgage assets and holding them until prices improve.

Last week, Treasury secretary Henry Paulson told a congressional panel that his agency is already looking for asset management firms with various levels of expertise to manage what could be a crush of product from hundreds, if not thousands, of financial institutions.

Bert Ely, the veteran accounting analyst, noted that before the government begins buying mortgage assets it will have a ton of homework to do. "This stuff is not homogenous," he said. "Each party selling will have different stuff. There's CDOs and CDO-squared. What do you offer the seller?"

Mr. Ely noted that before the government enters the market for distressed ABS it will have to develop an advance grading system. "It's going to take months before this thing gets going."

Meanwhile, some scratch-and-dent investors told this newspaper that they are hearing reports that the government - once it buys ABS - might begin "calling" the securities and disassembling them back into whole loans.

One asset investor, requesting anonymity, said one option the government may take is stratifying whole loans into grading categories, selling off the better quality pools first.

Mr. Ely noted that the government, in contracting with outside advisors (asset managers), could consider offering "an incentive program" to managers based on their returns but cautioned that depending on how it is structured, "Congress could blow a gasket."