First off, Bank of America wins here. The company’s already written down the bad loans it bought from Countrywide, and the bad debt from Merrill Lynch will be next. The value BAC put on this paper is most likely below what the government will be paying once this new legislation kicks in. So as soon as Washington sets a price, BAC will be able to revalue the loans on its books to the upside. Then the bank will hold assets worth far more than they’re currently valued, freeing up capital and allowing BAC to lend again.
Wachovia, too, should benefit. CEO Bob Steel is a former undersecretary of the Treasury for domestic finance, so he has a good grasp on how this plan will work. Cramer thinks Steel intends to split WB into a good and a bad bank, the latter going to the government in return for an equity stake. The tradeoff is worth it, though, because all the bad mortgages WB picked up when it bought Golden West will no longer be a drag on the balance sheet. Then Wachovia should be in good position to move forward.
A rejuvenated Goldman Sachs could be a player here. Cramer thinks the former investment house turned bank holding company could make a bid for the ailing Washington Mutual’s massive deposit base. Even a buyout of Wachovia could potentially be on the table, he said.
It’s the taxpayer, though, that wins out most of all. The problem with all these bad mortgages is that no one’s been able to set a price for them. But government intervention creates a market and relevant prices at which to sell them. Even those complicated collateralized debt obligations can be unwound loan by loan and valued so as to make Washington – and the taxpayer – a profit.
Remember, the government has a tremendous advantage here. Washington can afford to buy all this bad paper and sit on it until it increases in value. Banks can’t because it ties up too much capital.
Here’s Cramer’s priority list for approaching the mortgage problem:
First buy the 30-year fixed mortgages in high-foreclosure areas. Think Florida and California. It’s imperative to keep these people in their homes, Cramer said, because every foreclosure just makes it that much harder to get out of this mess.
Next the government should buy the teaser-type loans, and only after that focus on pick-and-pay exotics. If the focus is to both put a bottom under housing and generate good value, everybody, taxpayers included, comes out ahead.
And there is great value out there, Cramer said. Sixty percent of the loans in question are in just a handful of places, many of them major metropolitan areas. Stop the foreclosures, and we unlock the value. It should be that simple.
“I don’t think people realize how easy it will be to clean up this mess,” Cramer said, “once we get the plan passed.”
Jim's charitable trust owns Goldman Sachs.
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