Ravings from Leisa-Land

Or and Immodest Proposal for dealing with the debt crisis.

There is no question that "all of us are in this" whether we made a choice to be or not. Also, it is a zero sum game--so let's spread the pain first to those who were original parties and not have predatory capital swoop in and scoop off the cream and leave the taxpayers with the sour stuff.

So here's my proposal--admittedly roughly hewn. I was inspired by NG's comments--as I was crafting a response to certain of his points, I thought of this. While not terribly well thought out, (I don't have the background to think more on it and produce a better result), I do think that there are some meaningful nuggets here.

The underlying premise, which might be totally ludicrous, is that by aggregating more, you will spread the losses out among more folks who directly participated in the issuance of, purchase of, or speculation in these securities.

• Create some transparency and have some trustworthy place where every frickin swap and the related sellers and buyers is recorded;
  
• Round up all the underlying debt that these swaps are based on and catalogue it;
• Find some meaningful way by some credible third party (I'd like to see a group comprised of investment bank advisor(s) NOT involved in this stuff, public accounting firm(s); SEC and Treasury among others) to create some sort of to create homogeneous pools of the underlying debt--not by issuer, but rather by risk profile. (Perhaps cold fusion would be easier). Assign interest rate (a haircut can be taken here too).
  
• Unitize each homogenous pool of debt (bond holders will also be homogenized, and they'll get units in a broader collateral pool--the goal is that the larger collateral pool is of better quality. Let's say all BBB mortgage backed securities are combined and throw them into a single pool regardless of issuer. Original unit value is par based on the current outstanding principle. The pool will be unitized on a monthly or quarterly basis based on the current value of expected future cash flows. Naturally maturity dates will have to be taken into consideration. The difference between par and the PV will be kept in loss reserve tied to each homogeneous pool.
• All bond holders of discrete securitizations will receive a new securitization of collateral from the appropriate homogeneous risk pool. Again, interest rates may be adjusted if needed. (Hey, they caused this problem too by not paying up for risk).
  
• Recalibrate swaps based on the value of the underlying risk pool. (This is very fuzzy to me).
  
• Issuers of debt within the pool will pay a monthly fee based on the original principle. Such fee will pay for administrative oversight as well as fund a loss reserve based on some model!; They were initiators of this, they should pay a fee to resolve this.
  
• Bond holders receive principle and interest payments relative to PV of their portion of their units. Bond holders will end up with an instrument that in re-secured by receive principal payments adjusted for the current expectation of the loan loss reserve. If it is 87%, then their principle payments when due will be adjusted accordingly. IF future performance is better, they can get a better payout. In no event will previously paid principle be adjusted downward. (Which means, the administrators better have good PV discounting models).
• For all investment banks that both underwrote and sold this debt in addition to betting against it: take the fees from underwriting, issuing etc PLUS their gains on betting against this crap that they were issuing and net it against their losses. Consider levying a reserve pool tax against the difference and put that in as part of funding the loan loss pool.
  

Meaningful role of the government:

• Provide appropriately minimal, but meaningful underwriting to loss reserves to provide some stability by removing large uncertainties;
• Ensure that there is a fair means of loan workouts that do not provide perpetrators of fraud to gain.