PPIP is a fraud - What Really should be done

The newest attempt by the U.S. Treasury department to bailout the mortgage crisis is just another failure.

In theory it encourages investments into worthless Collateralized Debt Obligations (CDO) by using a combination of public and private money to purchase them at auction.

In fact, the private money can be as little as 7% of the total purchase price and the "auction" has little to do with what you and I consider to be an auction.

What will happen in reality is the CDOs that still have value will be purchased at a deep discount by leveraged offerings of a little bit of private money and a lot of public money. The private investor will make a killing.

Meanwhile the worthless CDOs aill be purchased by a little bit of private money and a lot of public money and the originating mortgage owner will still default. The CDOs will become very worthless and will be sold on the secondary market to debt and bill collectors who will end up with the property. If the secondary market investor is the same as the auction purchaser, he will make a huge killing after he collects the defaulted property. Even if they are distinct entities, the auction purchaser will only lose 7% of his total investment and the seconday market investor will still make a killing on the property claim.

As you can see, nothing happens to reduce the evictions of home owners. Nothing happens to protect the taxpayer. And nothing happens to make credit actually flow again.

Here is what should be done.

Let's start by asking several questions:

1. How many CDOs have been issued?
2. What is the issuing value of each?
3. What mortgages were combined to costruct each CDO?
4. How much is each mortgage worth now?

Answering these questions is called unwinding the CDOs.

When you have unwound each CDO, you can compute it's remaining value. Some of them have the same remaining value as they had when they were issued. Some of them are worthless.

All CDOs should be rated accurately as to how much value they still have. If all of the mortgages which back the security have paid 100% on time, the CDO should be given a 100 rating. If all of the mortgages which back the security have defaulted, the CDO should be given a 0 rating. If half have defaulted but half have paid and are paying fully and on time, the CDO should be rated 50. And so on.

CDOs which are rated like this have a value and can be publicly and honestly traded. CDOs which have no rating have no value.

We must establish a public system of rating financial instruments.