Pablo Díaz de Rábago
November 10, 2008
The US should re-rate Mortgage Backed Securities (MBS) based on real ability to service debts, then insure them with a bottom price (found in reverse auctions) only if sold from depositary to non-depositary institutions.
Key to finding a new price for Mortgage-backed securities is the ability of the system to value the myriad of variables that affect MBS. Since the value rests in a plurality of factors (CDS, tranches, income of debtors, etc…) my approach would be the following:
1.- Have rating agencies review ratings for the “barehouse” MBS (i.e. pre-CDS or other credit enhancement) with a new set of parameters which are set objectively, are based on real ability to service mortgages and not on house prices, and can be processed quickly. This review should be carried out following a Pareto structure systematic.
2.- New “barehouse” ratings should be issued by rating agencies. The ratings should be reviewed periodically every few months.
Once all this ratings are set, I would “reverse-auction” the ratings to come to market prices as fast as possible.
Those market prices should be set as a “guaranteed floor” for the rated instruments. These “guaranteed floors” would be issued only to non-depositary institutions and for a limited period of time (say five years) to be used in the purchase of MBS held by depositary institutions.
Then, TARP would need to be used again to recapitalize the banking industry.
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