This would instantly give the lending banks new capital. As these mortgages would be guaranteed by the Treasury, they would suddenly be assessed, on bank balance sheets, at their original value â€” and a significant amount of the banks' lost capital would be restored. Plus, the banks would receive, from most of the homeowners with subprime mortgages, up to 15 years of teaser-rate payments ... Under this arrangement, American banks would have an incentive to buy back the subprime debt now being held by foreign banks and other financial institutions. American banks could buy the securities at a discount to face value (reflecting the continued low teaser rates) and then, thanks to the government guarantee, hold them as capital assessed at their full value. That, in turn, would allow the other financial institutions to reinvest in other sectors of our economy.Do not pass "moral hazard." Do not stop at "taxpayer-funded bail-out." Nothing to see here, people, move along.
Bank CEO Calls for Federal Guarantee on Troubled Subprime Mortgages
In an op-ed published Wednesday by the New York Times, New York Private Bank and Trust CEO Howard Milstein writes that the Federal government should step in and guarantee principal on troubled subprime mortgages for 15 years, while banks agree to freeze "teaser" rates on affected mortgages. From the story: