Billionaire financier Wilbur Ross says legal issues have inhibited investors like himself from diving in to the market for damaged assets like mortgage loans.
On Tuesday, Treasury Secretary Tim Geithner unveiled a plan that will set aside hundreds of billions of dollars to coax private capital into the toxic swamp of securitized mortgage debt now plaguing bank balance sheets. It was not immediately clear how the plan would work.
In a wide-ranging and exclusive interview with Moneynews.com prior to Geithner’s speech, Ross explained that the one-size-fits-all approach that seems to be the strategy of Congress and the Obama administration is fraught with obstacles — starting with the law itself.
“Most of the loans are in securitizations,” Ross, chief executive of WL Ross & Co., told Moneynews.com. “The terms of the securitizations usually put limits on what you can do to modify the loans.”
For example, he said, “Many of the indentures say that you can’t modify, namely, change the payment schedule on more than 5 percent of the original amount of the loans. Well, in today’s world, 5 percent doesn’t get you very far, because the delinquencies, particularly in the subprime sector, are large multiples of 5 percent.”
In addition, Ross said, “it’s very rare that you can actually buy the loan out of the securitization. In general, it provides that you must foreclose first and then sell the underlying real estate. So, there are a lot of legal issues that are getting in the way of restructuring.”
And this isn’t a problem the government can easily solve, Ross said.
President Barack Obama recently backed the idea of getting judges to directly alter mortgage contracts in an effort to stave off coming foreclosures on millions of homes. Ross criticized this approach.
“The notion of the government retroactively abrogating contractual relationships among the parties is a very, very slippery slope to go down,” Ross pointed out.
“If nothing else, it would have a very chilling effect on lenders’ willingness to make mortgage loans in the future.”
In fact, the bankruptcy code was changed a few years back to prohibit the face amount of mortgages from being reduced, Ross noted, in order to encourage lending.
That way, lenders “at least would know what their claim would be in the event of insolvency of the borrower. … The biggest problem now is that there is no new money for mortgages, except basically for government-insured mortgages,” Ross said.
In addition, Ross said his company's purchase of a small Florida bank represents a beachhead that he hopes will grow much larger with additional acquisitions.
He agreed last month to purchase 68 percent of First Bank and Trust Co. of Indiantown for $7.6 million.
Next stop for the new, Ross-controlled entity — expansion.
Asked if his purchase is comparable to the way Bank of America grew from a regional bank into the largest U.S. bank today, Ross told Moneynews.com, “Yes, that would be the hope.”
“We wanted a clean, safe starting place,” Ross said. “But there are many, many banks here in Florida, particularly on the East Coast of Florida, that are in a lot less fortunate circumstances.”
When the FDIC comes in to rescue such troubled institutions, “it likes to close the bank Friday after the close of business and re-open it Monday as something new,” Ross noted.
“You really need to be a bank to participate in that kind of an assisted transaction.”
The Financial Times reported Tuesday that Ross and the Carlyle Group might bid on Florida's BankUnited Financial Corp., citing sources.
Additional key points from the interview:
• Ross supports the concept of "bad bank" to clean up the mortgage loans mess. The rationale for separating out the assets is very straightforward, he says, in that it lets bank managers return to lending without distractions.
"Putting the bad assets in one pile with dedicated teams that are experienced in doing so is the right idea," Ross said. He suggested a loss-sharing formula to prompt private investors to get involved in value those damaged assets.
• Regarding the bank bailout so far, the first installment under former Treasury Secretary Henry Paulson was just "filling up a hole" to stabilize the banking system and did not thus lead to new lending.
Banks are still frozen with fear, a situation that has to change. "Those same banks that weren't afraid of anything for years are now afraid of everything," Ross said.
• While generally in support of a stimulus, Ross said small refund checks would have limited effect.
"That's pretty much been the history of these random little checks. I'm much more in favor of infrastructure activity or a permanent change in the tax code so that people would know that their income, post-tax, would be improved," he said.
• Regarding the potential for serious inflation follow the trillions of dollars being dumped in the economy now, Ross said the work of slowing an economy is fundamentally different from restarting a stalled economy.
"I think the Fed has shown historically that government has better tools to try and contain inflation than it does to stimulate a depressed economy. ... With consumer confidence being as low as it is, just injecting funds isn't going to change the picture. You've got to change the psychology as well."
• As for investing, WL Ross & Co. has been buying debt — specifically senior bank loans — but avoiding more junior high-yield bonds.
"We think the default rates are going to go up, up, through the sky. So, as a result, high yield may be a very hazardous place to be," he warned.
• Finally, the steel and manufacturing magnate believes that America does not graduate not nearly enough engineers compared to India and China, which produce six engineers for every American engineer now coming out of school. Worse, many U.S. engineers will go abroad, he warned.
"The odds of our engineers being six times as productive as the Asian ones are pretty low."
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