Open Letter to Congress – Dean Engle, Park Tree Investments
October 2, 2008
An Open Letter to the U.S. Congress Regarding the Current Financial Crisis
By: Dean Engle, Managing Director, Park Tree Investments, LLC
[This article may be reprinted and distributed without further permission]
To state in the public markets that there are no public markets for distressed mortgages (forget mortgage
derivatives for a minute, let’s just focus on whole loans) is downright wrong.
Just because a Seller doesn’t want to hit a buyer’s bid doesn’t mean there is no market for his assets. It
means that either: a) the balance sheet damage from the Seller hitting the Buyer’s bid is too large to bear,
or; b) the Seller believes the NPV of the assets they’re offering for sale is greater than the bid being offered
by the Buyer.
The “Basis Factor”
Let’s look at the Sell side of the equation on a typical whole-loan trade.
A simplified equation of the whole loan secondary market looks kind of like this:
Bank would like to get 55% of face value on a pool of mortgages.
Investors’ offer price for these mortgages is at 40% of face value.
Potential for recapitalization from government entity: non-existent.
Conclusion: No trade.
A simplified equation for tomorrow could look something like this (almost regardless of how the bailout
actually looks, some of the fundamentals of this simple equation will come into play):
Bank would like to get 55% of face value on a pool of mortgages.
Investors’ offer price for these mortgages is still at 40% of face value.
Government’s offer price for these mortgages is at 50% of face value.
Government's “strings attached”: tough-to-quantify-but-these-warrants-don't-make-sense-and-Treasury-isn't-
moving-fast-enough-and-these-private-funds-don't-ask-half-as-many-questions
Bank's decision: 50% chance of selling to Investor, 50% chance of selling to Government
Conclusion: Possible trade.
Page 1 of 3

Open Letter to Congress – Dean Engle, Park Tree Investments
If Bank sells to Investor at 40%
Investor can resell for 45% and make a 12.5% ROI (assuming these are fast trades, IRR is through the roof).
Re-sale price of paper on the secondary market: 45%.
Trading volume increases hugely.
Add a Tax-Free Price Premium
Now, if you take the same equation we were looking at and focus on the Buy side, it could look like this:
Bank would like to get 55% of face value on a pool of mortgages.
Investors’ offer price for these mortgages is still at 40% of face value.
Government offers to waive capital gains tax on distressed debt trading gains for a 12-month period.
Assuming 28% capital gains tax, Investors’ offer price can be increased by 150 bps for these mortgages and
yield the same post-tax profit from the trade. That may not seem like a lot, but anything that can reduce the
bid-ask spread would be worthwhile.
And this isn’t exactly stealing from expected tax revenues. Since these loans aren’t trading anyway, there is
no taxable revenue that’s being generated in the meantime.
Bring in the Clean-Up Crew
The key to successful Government intervention is in continuing to enforce and encourage an efficient
marketplace. Our advice: don’t fetter the FDIC in its mission to shore up the banking sector by selecting those
that are healthy, infirm and dying. Force it to publish its Bank Watch List, and earmark $100B in Treasury
funding to bolster the FDIC’s insurance funds, rather than see the FDIC have to borrow from Treasury.
The key to shoring up balance sheets is to actually let those institutions that have salvage-able balance sheets
to effectively show how sick they are and to promote their revival by letting them liquidate their assets
through the induced price premium.
The other side of the coin, of course, is that for those institutions for which trading at market prices is a
death knell, well let that death knell ring. Either the institutions will be pegged by the FDIC on their Watch
List and investors will pummel their share prices and force them into bankruptcy or liquidation territory, or
they’ll bite the bullet, book their trades and hope and pray that the FDIC can find them a suitable rehab
partner on the back end like they just did with Washington Mutual and with Wachovia.
And for God’s Sake, Treat the Uncertainty
One enduring fallacy in the markets right now is that the credit markets have frozen due to the uncertainty
implicit on banks’ current balance sheets.
Page 2 of 3

Open Letter to Congress – Dean Engle, Park Tree Investments
That’s a gross simplification of the mortgage pandemic. Uncertainty in the markets right now is driven by the
complete inability of servicers’ and sophisticated investors to model future performance on the balance
sheet.
One across the board measure that should be taken up immediately is to fix variable rates for high-risk
borrowers. I won’t attempt to define who would qualify as a high-risk borrower here, nor can the most
sophisticated of services and hedge fund analysts run predictive models to predict loan behavior, it seems, so
a rough spatula should be applied to the frosting on this Variable Rate Cake to just fix rates across a swath of
mortgages.
Rather than have Treasury become one of the nation’s top 3 asset managers with a $700B+ portfolio, it should
legislate rate adjustments across the board in order to achieve the key result it should be aiming for – to
drive mortgage-related assets to perform to a more predictive model in order to cut down on the uncertainty
of asset values on banks’ balance sheets.
Further, Congress should press to include legislation in this bailout to allow Bankruptcy judges to become this
nation’s de-facto mortgage underwriters. It’s a no-brainer.
The job of responsible underwriting was never done correctly in the first place by crooked and greedy
mortgage brokers and irresponsible lenders – we all agree on that. So at least let someone who’s unbiased and
informed mitigate the risk of future default by re-writing those loan terms!
I hear the industry protests about rising rates and random cram-downs, but when you compare the detail a
debtor needs to file on their bankruptcy schedules (and that a US Trustee needs to review and advise a
Bankruptcy judge on), and compare it to the one-line stated income mortgage application that oh-so-many
line-their-pocket mortgage brokers mass-filed with lenders, that argument is a load of bull.
Sincerely,
Dean Engle
Managing Director, Park Tree Investments, LLC
About Park Tree Investments: Park Tree is an investment firm specializing in distressed residential real
estate debt. It is headquartered in San Francisco, CA. www.parktreeinvestments.com
Page 3 of 3