Today it looks like Secretary Paulson will relent.  An early report says that he is going to concede on the issue of CEO pay.  In the arrangement, financial institutions that seek the federal government to purchase their distressed assets must agree to an as yet undetermined set of restrictions on the pay of their CEO and their boards.

This follows on some general outrage about executive compensation.  One report shows that CEOs earn, on average, about 275 times what their rank and file employees make.  That’s a high number, much higher than in the era of industrialized economies with their labor unions.  It is much higher than before globalization.  With NAFTA, GAAT, and the rest, certain jobs and skillsets have been able to be utilized across greater spans.

All of that is to say that there is alot of reason for people to be upset about CEO pay.  Yet it seems like its the wrong remedy for this illness.  Again, the problem is the way that these mortgages have been underwritten and subsequently sold.  The problem is subprime lending.  The problem is within securitization into things like collateralized debt obligations, i/o strips, and the like.

CEO pay is a fine thing to add to a bill that redresses those wrongs.  But we are making a big mistake if that’s the thrust of the reforms that critics of TARP focus upon.

The Troubled Assets Relief Program (TARP), as the bailout bill is formally known, is a threat to the order of our constitution.  Consider this one sentence:

“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency…”

This bill would eliminate oversight options, once enacted, that would give Treasury unfettered control.  Its a huge grab of power.

This is one more reason why lawmakers cannot accept the bailout bill in its present form.

Right now, there are plenty of odd alliances.  To hear Jim Bunning, a conservative Senator from Kentucky, express outrage against the same bill that community advocates are finding reprehensible, is a real bit of entertainment.

Except it’s not funny.

If you are watching the financial crisis, then an important detail will be to see how groups agree on the terms of the pricing of these assets.  There appear to be two main approaches:

The Net Present Value Model

In this scheme, the value of the future cash flows from a mortgage are discounted to produce an equivalent one-time exchange value.  Discounting depends upon an agreed “time value” for money.  Usually, with government investment, time is less valuable than with private investment.  In this instance, its a public buyout of private goods, so the prevailing value could be in doubt.  A public discount rate might by 8 percent, but a private rate could be as high as 12 percent.  Oddly, in this case, the public rate would produce a higher resale value!

Anyway, with the NPV calculation, these assets could be priced much higher than their market value.  That is because the flood of distressed mortgages that send the market values down is not felt in this model.

The Reverse Auction Model

The other option is to create a pricing scheme that forces the private firms to make their own judgments about the value of their distressed assets.  In a reverse auction, banks would indicate the lowest price that they are willing to accept.  The government would then buy loans from the bottom up.

The taxpayer does better in this system.  The banks are forced to make hard choices.  If they accept 30 cents on the dollar in a reverse auction, then they are giving up a lot of upside.  It goes with out saying that in this approach, only the most toxic assets will be bought by Treasury.  Then again, that makes the public investment the most cost effective choice.

The downside is that greed will encourage some banks to keep toxic assets on their balance sheets.  Then, the $700 billion may not be tapped, and the crisis could continue to linger.

Pay attention to which approach is utilized.  It will have a big impact on the outcome from the perspective of both taxpayers and banks.

With the news on Friday that the Treasury may buy distressed mortgage assets, all American taxpayers should become interested participants in the regulation of our housing finance.  On Friday, Treasury announced that it wanted to set aside as much as $700 billion.  In a separate but related move, it put about 800 financial stocks on a list protecting their shares from short sellers.

Today, Stephen Davidoff reveals some details.  One startling fact is that the total sum of purchases may go well beyond $700 billion.  As proposed, the Treasury would have that amount to spend at any one time. Upon selling assets, they could take the proceeds and buy more mortgages.

Just as stunning was the possibilty that assets will be purchased at net present value, and not at market value.  This means that potentially banks will find a buyer in the Treasury willing to pay cash, right away, at prices far above prevailing market conditions.

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Some have proposed that a bailout of this size requires some regulatory changes, too.  The logic, by these groups, follows that a remedy which does nothing to treat the underying illness is merely a type of cosmetic surgery.

I hear these voices.  I understand the anger people feel about high executive pay.  That is a problem, but I am not sure that focusing on that issue (CEO pay) will be the lance that heals this wound.

No, I wonder if instead the issue has to focus on the arcane details of safe and sound underwriting.  We know that stated-income, option-ARM mortgage loans are a problem.   We know that making loans to people who are now saddled with debt service that takes 48 percent of their monthly income is a problem.  We know that originating negative amortizing loans leads to trouble, especially if housing prices do not go up.

The regulators have known for some time that underwriting standards were slipping.  Its time for them to do their job.

Residents at Helendale Mobile Home Park and Blanton Mobile Home Park, in Hope Mills, North Carolina, have been notified that they have six months to pick up and leave their homes.

The two parks, located in Southeastern North Carolina, are home to about 70 families.  The Blanton family also owns a number of the units.

The parks will be converted to a new use.  Anyone who owns a home on the land must leave, per the notice given on August 28th, by the last day of February 2009.

According to a notice sent by the law offices of McCoy, Weaver, Wiggins, Cleveland, Rose Ray PLLC, the Helendale Park consists mainly of residents who own their homes.  The Blanton Park houses residents who have been renting both the land and the homes where they live.

Helendale MHP contains 26 singlewides.  Another 24 lots are vacant.  The oldest home in the Helendale Park dates back to 1968, but otherwise, all of the homes are built after the passage of the HUD code.   Most are relatively new, in fact.  Fourteen of the homes were built after 1990.

Notice of the closure went to the North Carolina Housing Finance Agency.  This is part of language written into N.C.G.S 42-143.  This law was revised in the previous short session.  One of the changes is the requirement to post the intent to change the use of the park to the NCHFA.