Saturday, September 27, 2008

Why not? - Private Investors - Targeted Tax Holiday for MBS & ABS

The US Treasury proposal to commit up to $700 Billion to "shore up" banks and Wall St's balance sheet is The Riskiest for the US taxpayer because it sends cash today (or in drips) OUT of the Treasury.

Policy makers state today's values of MBS and other Asset backed securities (ABS) are at, as Chairman Benanke suggests, "at fire sale prices" indicating a belief in a transient diminution of value; if correct then private investors may have appetite given the correct set of incentives.

A much less risky solution, requiring no UPFRONT outlay of US Taxpayer cash could be fashioned with an IRS-supported targeted tax holiday for private investors; such as for example.

For MBS and ABS securities purchased from today thru end of 2008 - gains on sale / marks qualify for a tax free basis.

Later variations on this theme should gradually increase the incentives to establish positions / basis sooner than later; with later positions subject to a less generous set of tax incentives.

Another potential solution
Title IX housing program policy could be reworked and applied to an investor's purchase of MBS / ABS today - such that tax incentives enhance the private market's opportunity set.

If as another blogger suggests, that the US Treasury enjoys a spread capture of over 10% due to it's structural borrowing advantage; given similar incentives the private investor SHOULD be first extended the opportunity to bid; it's a prudent, natural step in the US Treasury's fiduciary duty to the taxpayer.

No comments: