Time for a Global Resolution, Electronic Applications and Trust (GREAT) Corporation?

Driving across the southeastern California desert Tuesday, three and one-half days after my last day in the office for the Bush Administration, I happened to hear my early 90s law and economics professor Ben Stein suggest on TV that it’s time to employ a bunch of smart unemployed MBA-types at a modern version of the Resolution Trust Corporation to clean up the financial mess. Ben’s idea to create infrastructure to facilitate sustained financial recovery holds more promise than all the talk about spending to “stimulate” economic growth.

Thanks to infrastructure convergence, I could hear Ben’s idea in the first place. The satellite radio carrying Ben’s TV signal, the radar-controlled cruise control that cut the fatigue of driving and gave me more time to find audio content, and the Interstate Highway System that let me cross the nation so quickly all show the potential value of infrastructure.

The highway system is more than 50 years old, but satellite radio and radar cruise control are both younger than the RTC. So with countless business process infrastructure improvements since the days of the original RTC, how might a modern RTC, or something like it, work better now than it did in the early 90s?

First, a better outcome is one that costs the government as little as possible while making the assets market as efficient as possible. (By the way, are the assets at issue really “bad” or “good?” Or is the better question whether asset prices are in the range of what the owners thought they would be? Assets don’t bankrupt people; people bankrupt people.) An outcome in which the government pays inflated prices for opaque instruments is undesirable; an outcome in which market participants have as much information as possible to help them allocate resources rationally is more desirable.

As the New York Times reported Wednesday, “Banks may not want that kind of openness, because accurately valuing the toxic assets could force many to book big losses, admit their insolvency and shut down.” But accurate valuations for bad assets don’t cause profitable operations to vanish from the face of the earth. Business lines without hope of solvency should be shut down.

That’s not a “hard” choice of the sort the President discussed Tuesday — it’s easy. Capitalism works because babies don’t get thrown out with bathwater. Managers, of course, might be, but that’s just another reason to get back to growth — so managers making bad decisions can find new and more productive things to do with their lives.

So how might a modern RTC be faster, better, and stronger than the early 90s version? One way would be to exploit business process infrastructure improvements during the past 15 years to reduce government risk and to increase opportunities for private sector managers to put their own resources at reasonable risk. Consider various business process improvements in the years since the first RTC:

• Internet infrastructure called html met the newspaper industry and rocked the newspaper world.
• Internet infrastructure in the form of standard computer languages met the travel industry and rocked the travel world.
• Internet infrastructure called .mp3’s met the music industry and rocked the music world.

In each case, customers got better products, better delivery, and better prices. For suppliers, this new power turned existing business models upside down. The key prerequisites in each case were industry standard computer languages that made communications, transactions, and therefore markets vastly more efficient.

As in those cases, Internet infrastructure gives financial customers more choice, more information, and more power. Already, it has cut the cost of investing by making brokerage commissions vastly more competitive and forced Realtors to negotiate more competitive fees. As it did to publishers, travel agents, Realtors, brokers, and recording industry executives, Internet infrastructure promises to turn every financial managers’ world upside down too.

More efficient business models mean more customers get better products at better prices. The winners are the customers and those who serve them; the losers are those who hang on too long to outdated processes and the profits derived from arbitraging information advantages.

The “exotic” tools the Senate discussed at Wednesday’s confirmation hearing for Tim Geithner are old school instruments that rely on opacity and proprietary information. CDO’s were created and squared and cubed and hedged with CDS, all on top of simple mortgages, for the simple reason that the first level of mortgage backed securities lacked the transparency and liquidity to stand on their own. Technology exists to change that. The necessary will, authority, and rules do not, but that’s nothing a few legislative sentences couldn’t solve.

Geithner said at his hearing that the way to proceed is to have the government take the risks that the private sector will not take. Fair enough, but in doing so, the government should strive to create a system in which the market voluntarily bears as much risk as possible and as little risk as possible is involuntarily imposed on taxpayers. Creating a transparent system using an industry standard computer language infrastructure to help the market understand and undertake risk is itself a low risk venture. Moreover, it’s infrastructure worthy of serious consideration.

And since every government program needs an acronym, here’s a suggestion for naming Ben’s new RTC: the Global Resolution, Electronic Applications, and Trust Corporation, or the GREAT Corporation.

Why Global? Unlike the early 90s, today’s challenges are international. The GREAT Corporation must use global tools to maintain global markets for asset backed securities.

Why Resolution? The Wikipedia entry for the RTC is worth reviewing for its explanation of the infrastructure used to recreate a market for troubled assets and to generate ideas on how new technology might make such a system more transparent and less expensive to implement.

Why Electronic Applications? Because asset backed securities are typically based on thousands or millions of individual credit transactions (most significantly mortgages), only computers are sufficiently powerful to manage and disclose the information the market needs to value those securities.

Why Trust? GREAT would be structured as a corporation and its directors would operate as fiduciaries for its owners — whether the owners be taxpayers, the private sector, or some combination thereof. How about giving it NPO status and start-up capital in the form of a government contract and a mandate that it approve the disclosure format before securities are offered to investors or taxpayers?

Perhaps technology has advanced to the point where government capital isn’t even necessary to create a 21st century version of the RTC. Maybe it should be possible to resolve the financial crisis using private capital. Maybe not, but whether it was private, public, or some quasi-governmental hybrid, the GREAT Corporation would be responsible for ensuring that information about securitized debt was disclosed using an industry standard computer language capable of providing the transparency needed to establish market prices for assets that today’s holders remain unwilling to price.

Anyone?