As Congress battled over the terms of the Treasury bailout plan last week, Christopher Ricciardi, chief executive officer at Cohen & Co. and former managing director of global structured credit products at Merrill Lynch, launched an alternative proposal to the government's purchase strategy under the Troubled Asset Relief Plan (TARP) .
Under the current government proposal, the Treasury would tap asset managers to purchase troubled assets directly from financial institutions' balance sheets. Ricciardi suggested a Federal Bond Insurance Corp. (FBIC) that would provide a fee-based government guaranty to triple-A-rated senior classes of securitizations backed by a variety of assets. The plan could also, on an optional basis, require that bond insurance from a double-A or triple-A rated monoline first be secured for the asset.
This plan, Ricciardi argued, would enhance investor willingness to "purchase, trade, finance, and easily mark-to-market" these assets since they are backed by the government. The FBIC would only take a hit after private investors and the monolines lose everything first, thereby reducing the risk to the taxpayers.
Several market participants felt that while the Riccardi plan brings up interesting ideas, it leaves many questions unanswered. For instance: how would the government allocate financing? How would the assets be collateralized? How would the government determine the interest rate, and is everyone eligible for the same rate?
In an interview with ASR, Ricciardi addressed the asset allocation process in his proposal, which would include any of the assets that are currently contemplated under the government bill. "Anyone can take the pool of assets to the government whether it is a fund or an investment bank, and they go through the process of structuring a securitization, getting the senior part rated, as well as deciding whether there will be an additional monoline wrap," Ricciardi said.
The interest rate would take the form of a guarantee fee, similar to the guarantee fee under Ginnie Mae or the Small Business Administration. If the assets being guaranteed are triple-A and have bond insurance from a higher quality monoline, the fee would be relatively low. On the contrary, the fee would be higher if there was no insurance. "While it is an issue to decide on a fee for guaranteeing the senior pieces of securitizations, I think it is easier than trying to price distressed mortgage-backed securities," Ricciardi said.
The guarantees would be collateralized by the assets themselves, Ricciardi said, "companies wouldn't have to give up equity, it would just be pure financing."
However, the biggest question remains, in light of the residential overhang in the market: how would this plan reduce housing supply in the same way as the potential modification of government-held loans under the original plan? While it doesn't directly address the foreclosure problem in the U.S., Ricciardi said, his plan would provide a mode of financing that should in turn help home prices - which seems to be a recent driver of foreclosure, he said.
Ricciardi also suggested that if the government is saving money on this program, there is the potential for another program to be set up to strictly address the foreclosure issue and loan modifications.
"The government could be the intermediary between borrowers having difficulty and the assets in the securitization," he said. "They could assume the liabilities and create a payment plan for the borrower where they lengthen the maturity and lower the interest rate. They would still allow the homeowners to keep the equity upside in the house over a very long period of time, and that should keep them there."
Ricciardi said that the major driver behind this plan was the success of securitization when used extensively in the S&L crisis, where it served as a way to jumpstart the process of distributing assets to the private sector.
(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.