12/12/2008

Deutsche Pushes for New Approach to Crisis

With no end in sight to the credit freeze, Deutsche Bank has detailed a senior executive to Washington to approach government officials about ways to help the crippled structured-finance markets.

Toby Cobb, former co-head of Deutsche's U.S. real estate division, is pushing his bank's view that private-sector players need to work together to devise ways to end the logjam in the commercial MBS, residential MBS and asset-backed markets. Deutsche believes federal regulators could play a key role in organizing and coordinating meetings among lenders.

Cobb was quietly given the special assignment as Deutsche's liaison to Washington several weeks ago. He is reporting to Seth Waugh, chief executive of the Americas, who came up with the idea of the fulltime liaison.

Cobb is meeting with officials from the Federal Reserve, the Treasury Department, the FDIC, Fannie Mae and Freddie Mac to both offer feedback on existing bailout programs and promote Deutsche's view that the private sector will be key to any long-term recovery for structured finance.

"I am not prepared to say that we have thought of the solution, or that anybody has thought of the appropriate solution," Cobb said. "But I can say we are concerned about the possibility of another hundred-billion-dollar proposal for yet another government-sponsored program. So far the markets have not responded too well to these efforts. We think the private sector has to come together and create a solution, and we are encouraging the government to provide the leadership for that to happen."

Cobb said government programs by themselves would likely have only limited success. For example, he doubts that the government's original plan - since abandoned - to buy mortgage assets directly from banks via auctions under the Troubled Asset Relief Program (TARP) would have worked. He said investors would have viewed such purchases as an artificial attempt to create a market bottom.

"For the government to buy assets is a short-term, interim solution," Cobb said. "The government is not a long-term holder, so immediately the market will say, 'When will the government sell?' Because when it sells, prices will go back to where they were before the government came in."

Cobb thinks that it would be much more effective if private players stepped up to buy assets, because such trades would have far more influence on the market. For example, if large banks got together and agreed to buy paper, it could be an important stimulant, he said. He acknowledged, however, that additional capital infusions in banks by the government would probably be necessary for such an idea to get off the ground.

For such proposals to be considered, meetings among bankers must be organized. That's where Cobb sees the government playing a key role. "If I personally were to call for such a meeting among the banks, it wouldn't mean anything," Cobb said. "But if the Treasury Secretary were to call the meeting, the bankers would come. That's the kind of leadership role we are encouraging the government to take on."

Cobb recalled a famous story from the Panic of 1907, when equity prices on the New York Stock Exchange fell by half and liquidity dried up. Since there was no central bank at the time, financier J.P. Morgan stepped up and called together other leading bankers into his library and rallied them to end the panic by pledging capital to buy deflating assets.

"We need something similar today," Cobb said. "We need the leading bankers to come together and come up with a market-based response."

Cobb has also been working with trade groups such as CMSA and SIFMA to help craft recommendations to the government for nuts-and-bolts changes in the securities industry that could help kick start CMBS and asset-backed securities - including comments on rules regarding tax treatments, policies and regulatory measures. "The government has all kinds of tools in its toolkit," Cobb said.

Cobb joined Deutsche in 2000 after a stints at Donaldson Lufkin & Jenrette and Citicorp. In July, he appeared to be on track to move out of Deutsche's real estate lending group and into a Deutsche fund operation, but he opted instead to pursue the opportunity to work on Deutsche's behalf in Washington.

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