Posted 4/23/2010

OBAMA'S FINANCIAL PLAN: MISSING THE MAIN POINT?

The President's approach treats derivatives, securitization, ratings and unfair consumer practices as separate, free-standing issues.

This is wrong.

These issues are neither free-standing nor independent of each other.

They are each a part of the continuous business process which starts with a mortgage application and finishes with the sale of a collaterized debt obligation.

The most important part of any continuous business process is the material which flows into the process.

Grandmother always said, "You can't make a silk purse out of a sow's ear." This meant that all downstream steps in the process of making a dress (pattern, cutting, sewing, fitting, finishing) were dependent on the quality of the material – the bolt of cloth.

Father always said, "You can't make a good engine out of a bad block (casting)." No matter how good the engine manufacturing process was, it could not turn a bad block into a good engine.

The first users of computer analytical programs soon created the concept of GIGO (garbage in, garbage out), which means you can't produce an accurate analysis out of bad data.

Then why would bankers think they could produce a good mortgage-backed security out of a bad (subprime) mortgage application?

Hadn't the bankers heard of "Garbage in, garbage out"? Or, "You can't make a silk purse out of a sow's ear"? Or, "You can't make a good engine out of a bad block"?

Why would they think, "You can make a AAA security out of a subprime mortgage application?"

In any continuous business process, the most important component is the material that flows into the process. If it is bad, the result will be bad.

This means the President and his advisors are concentrating on the wrong things.

They should be concentrating on the mortgage application.

If applications for all subprime mortgages were prohibited, the remaining problems would largely take care of themselves:

• Bankers would issue only good (low-risk) mortgages.
• Good mortgages would turn into good securities.
• There would be no bad (high-risk) securities.
• The rating agencies would no longer give false high ratings.
• Foreign and domestic security buyers would buy only good securities.
• Banks would not be tempted to engage in unethical "debt masking."
• Downstream activities (credit default swaps) would become more secure.
• The government would become free of bailout problems.
• Main Street would no longer be abused by Wall Street.
• Future financial collapse would be averted.
• Faith in our financial system would be restored.
• Small business would get the loans necessary to create new jobs.
• The jobless recovery would turn into the "job-making" recovery.

And shoddy bankers and mortgage brokers would live unhappily ever after.

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