Alex J. Pollock Resident fellow

I feel compelled to write you about a basic axiom and fact of finance, in contrast to a statement in your Jan. 3 issue. Your article, "Challenges Mean Private Label RMBS May Need Some More Time," refers to "efforts to arrange deals that are not on anyone's balance sheet." However, every deal, every asset, is on somebody's balance sheet. The only question is, whose? Although we loosely refer to "off-balance-sheet-financing," this really only means "off my balance sheet and onto someone else's."

Why are some balance sheets better for certain assets than others? Well, some are less leveraged, some have longer-term funding, some have government favors and subsidies, and some may just be stuffees.

A particular irony of mortgage of mortgage finance is that "off-balance-sheet" funding by banks through Fannie and Freddie often enough has sent assets back to bank balance sheet in the form of MBS or GSE debentures, or even--unfortunately for the buyers--Fannie and Freddie preferred stock, now worthless.

From an overall banking system point of view, such assets move in an interesting circle.

Alex J. Pollock is a resident fellow at AEI.