The Money Is Waiting
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

This will be a cold Christmas for many American families. That’s because the usual warm feelings that happen around the holidays occur in a house whose value is appreciating. Mortgage troubles are spreading across the land, making many Christmases less cozy. Policymakers are evoking the New Deal when they talk about housing and Americans are wondering whether this era will be something like the deflationary 1930s.
But the reality is that there is some good news for all in the housing crisis. And it stems from the same problem that caused the subprime crisis to spread in the first place. Liquidity, the estimated $9 trillion in cash and money markets, that exists in markets across the globe is frozen — unavailable to investors, and certainly, to many families confronting a 30% mortgage rate increase after their loan resets.
Still, a thaw is possible. A change in liquidity hurt us; another change can help us. Waiting on the sideline are money market funds, sovereign wealth funds, and other investors. They need to invest their capital. There is still more money in the world than talent.
Consider the factors that brought us to this December frost. The first is familiar: the lower lending standards. Buyers who were formerly unable to borrow for homes were offered loans with little documentation and no income verification. In the olden days, which is to say 10 years ago, banks would vet these loans and keep them. Now, however, originating and selling mortgages by securitizing them became a better economic proposition for the banking community. The downside of the securitization of loans was that it made the transfer of risk far too easy and simply put, focused on quantity, not quality.
But the bigger factor, as in the crash of 2000, was the liquidity of financial markets — the ebb and flow of capital as it moves in and out of certain markets. Liquidity is tricky, it may be misunderstood, or not acknowledged at all. The Internet stocks of the late 1990s are a good example. When the stocks traded at their height in 1999 and 2000, more than five million shares of each company changed hands each day. When the stocks traded at their lows less than two years later, their trading volume dried up by 95%. Liquidity is a key to understanding value.
Now liquidity can work in our favor. In a deflationary environment, the small share of subprime houses in trouble could drag down the entire rest of the country. People are rightly concerned today about what is known as neighborhood killing. One family on the block loses its house and everyone knows what happens. The block itself gets a tainted reputation. People need to borrow more to be sure they can keep their homes, but in a deflationary environment, the money is not there — as in Internet stocks, or anywhere else.
This time the money is there, sitting on the sidelines. But for it to come back to places where the average American can feel it, three things need to happen.
The first is that everyone, from the homeowner to political leaders to Wall Street, has to recognize that this will take a long time to fix. We often talk about securitization, the bundling, repackaging and sale of mortgages into tradable products. Right now we are experiencing what might be called “de-securitization.” Some of these products have interests in as many as a million different individual family mortgages. Ten percent to 20% of the underlying assets are making 100% of the outstanding products very difficult to value. The problem is exacerbated by the fact that the new owners are as far away as Kazakhstan, Japan, and Taiwan.
The second thing we need to do is to increase transparency. Transparency will be demanded by regulators and markets. Companies will have to respond.
This will help reestablish confidence in new markets for the mortgage securities so that companies can again mark the assets to market. The prices will be painfully low, but it will be a start. Once the assets get active market prices, liquidity can flow back in.
That step leads to the third thing, the re-pricing of risk. It used to be that the markets knew how to talk to one another. Spreads were the language of communicating risk. When you wanted to know what something was worth, you looked at its price and compared it to London Interbank Offered Rate, the world standard rate at which banks lend to each other. In recent years that spread language became babble as the spread between the risky mortgages and LIBOR became unintelligibly narrow. When that spread reliably begins to reflect the default rate for marginal borrowers, the thaw will accelerate.
People often ask what Wall Street is.
We can answer that in a single sentence: It is a virtual marketplace that makes illiquid assets more liquid. That is Wall Street’s added value. When they do so the money flows again, and that will also happen with mortgage-backed securities.
Where does President Bush’s proposal fit into all this? The President wants lenders to hold rates on certain mortgages for five years so that a million borrowers do not go under. Observers on the left have said this move is not enough. Observers on the right charge that President Bush is widening moral hazard by focusing on relieving the borrowers at the lenders’ expense. Regardless of the criticism, we are fortunate to have Treasury Secretary Paulson and his vast market experience directly engaged in these activities.
My own view is that the President’s proposal is the least bad of all the political ideas on the table. It will do something to prevent that dreaded neighborhood killing over the winter. The President’s effort to get cities and states to work with community borrowers and non-profits and lenders is a good thing. If this happens people will stay in their houses, family credit scores are less likely to tumble and they will in turn continue to be active participants in the economy, also important.
Of course how banks handle this situation and how rating agencies react matter too. Rating agencies’ previous methods for measuring risk will be scrutinized by all parties involved. It is imperative to develop a new scale to rate nontraditional fixed income products, thereby bringing more transparency to the markets and ultimately restoring investor’s confidence in the products they are buying. Banks and companies have to be ever vigilant in making an attempt to mark down or write-off depressed assets.
And looking forward to 2008, banks will need more capital. We will begin to see a wave of bank consolidations. Fannie Mae and Freddie Mac should temporarily be allowed to buy loans exceeding their current maximum of $417,000. This will change the status of the famous jumbo loan.
Foreign bond buyers may not track what happens in an individual American neighborhood, but they will pick up the fact that the American housing market has re-tethered itself to reality. They are an important provider of liquidity.
The real luck in all this is that there is liquidity, accumulated over a remarkable period of growth and prosperity. Home prices may be too high, but they have risen in a period of real growth in the world. This growth will continue, particularly if the U.S. finds a market solution to its mortgage credit crisis. This period is nothing like the 1930s. The money is there. It’s just waiting.
Mr. Marron, former chairman and chief executive of PaineWebber, is the chairman and chief executive of Lightyear Capital, a financial services-focused private equity firm based in New York City. He is also a former director of Fannie Mae.