Is the P-T Plan a Solution for the Mortgage Circus?

Gretchen Morgenson from The New York Times is my new favorite person. Nevermind that she doesn't know me, she's helping to illuminate the financial crisis in a way no other reporter has been able to do. When this whole mess began I commented to a few people that underneath all of the pools of mortgages that had been sliced and diced and sold and re-sold, there must be value. After all, a very good portion of the public continues to pay their mortgage. (And perhaps some of those pools contain beachfront property that rarely depreciate in value???) According to Morgenson, when grouped together, these assets (and related mortgages) were unable to be individually valued. And traders didn't have the time to wade through all the documentation to figure out what was what. Instead, panic set in, and these securities became hot potatoes trading at pennies on the dollar when they did trade at all. (It didn't help that the ratings given to the securities by Moody's and S&P didn't bear any resemblance to actual risk levels, but that's a topic for another post...) The uncertainty surrounding the current bailout plan is killing the economy, the market and consumer confidence. No one knows what to expect. One day Paulson is going to buy rotten assets, the next he's investing directly in banks, and then, when that's not working, he's going to focus on making consumer-oriented loans available. In yesterday's Times, Ms. Morgenson summarized the Patrick-Taylor plan, an interesting variation on the bailout plan that, in all honesty, is simple and makes a ton of sense. At its core, the P-T plan calls for placing a value on the underlying assets, then refinancing the mortgages. The key benefit to this plan is that it clears the market; people will actually have a handle on what all this stuff is worth. (I point you to another Morgenson article from a few weeks back that speaks to this very point.) Only then can everyone re-adjust, take their losses and move on. So, what does this have to do with early-stage investing in Northeast Ohio? Not much except to point out that until Paulson and Co. figure out how to deal with the current financial uncertainty, there will be much wringing of hands and gnashing of teeth and not much investing in start-ups. The underlying angst created by the Treasury's flip-flopping has essentially shut down the market for angel investments. Venture firms are telling their portfolio companies to "do more with less." The gloom and doom is overwhelming. Yet, the costs of starting a technology company are lower than ever. It's a time when early-stage capital should be flowing, when costs are cheap and ideas plentiful (how many closet entrepreneurs are getting downsized as I type?). Remember, many of today's success stories (Microsoft, Oracle, Apple) were started during the bleak economic times of the 1970s. So, when you see some clarity coming from the bailout guys (hopefully in the form of the P-T plan), think about investing in start-ups. You could be funding the ‘next big thing.' Lynn-Ann Gries is the Chief Investment Officer of JumpStart. She previously worked in the investment banking departments at both McDonald Investments and Smith Barney (now part of Citigroup), and in the sales and trading area at Morgan Stanley.  She received her MBA from New York University's Stern School of Business and her BA in Economics from Smith College. She currently serves on the board of the Fund for the Future of Shaker Heights, the Great Lakes Science Center and Summer on the Cuyahoga (SOTC).