U.S. may buy up banks’ toxic assets

[jimmy olsen]

So, I know the government has been thinking about taking this step for months, why are they deciding to go this route now? JR what do you think of this step?

http://www.msnbc.msn.com/id/29817617/

U.S. may buy up banks' toxic assets
Unburdened of bad loans, banks could resume normal lending

updated 9:14 p.m. ET, Sat., March. 21, 2009

WASHINGTON - Struggling to contain the worst financial crisis in seven decades, the Obama administration wants to buy billions of dollars of toxic assets from banks to ease borrowing for consumers and businesses.

Some industry officials familiar with the details said Saturday they expected the approach would try to remove as much as $1 trillion from banks' books. An announcement from Treasury Secretary Timothy Geithner could come as early as Monday.

If banks are not burdened by the soured loans, then they would be in better shape to resume more normal lending.

According to administration and industry officials, the plan would rely on the Federal Reserve and the Federal Deposit Insurance Corp. to supplement the government's $700 billion bailout fund. The uproar over the millions of dollars in bonuses for employees at troubled insurance giant American International Group Inc. has dimmed prospects for getting more bailout money from Congress.

Three components of plan
The officials, who spoke on condition of anonymity because the details have not been announced, said Geithner's plan will have three major parts:

    * a public-private partnership to back private investors' purchases of bad assets. The $700 billion bailout fund would provide the backing. The government would match private investors dollar for dollar and share any profits equally.
    * expanding a recent Fed program that provides loan for investors to buy securities backed by consumer debt. It's an effort to make it easier for people to get auto, student and credit card loans. The Term Asset-Backed Securities Loan Facility (TALF) program is getting up to $100 billion from the bailout fund; that money then is being leveraged to support up to $1 trillion in Fed loans. Under Geithner's plan for the toxic assets, part of that $1 trillion would now go to support purchases of banks' troubled assets.
    * using the FDIC, which guarantees bank deposits, to purchase toxic assets. Officials said the agency would create special investment partnerships and then lend them money to buy up troubled assets.

Industry officials said the administration had not disclosed to them the exact amounts of money to be devoted to the effort.

"The key is going to be if the government buys these assets quickly," said Mark Zandi, chief economist at Moody's Economy.com. "The sooner they get these assets off banks' balance sheets, the quicker the system will find its footing and get the economy moving again."

Geithner's announcement last month of the financial rescue overhaul was widely panned by investors. The Dow Jones industrial average plunged by 380 points in large part because investors were disappointed that Geithner did not have more details.

Some analysts worry the market may once again be underwhelmed, in part because not enough resources will be devoted to the problem.

"The market is looking for a 'wow' factor where they can see the administration is finally doing enough," said Sung Won Sohn, an economics professor at the Smith School of Business at California State University.

The administration had said in February it needed more time to work out thorny problems that former Treasury Secretary Henry Paulson and the Bush administration had been unable to resolve.

Overhaul of financial regulatory structure
Geithner's new plan is meant to attack what is widely viewed as the major failure of the bailout program so far: the inability to rid banks of a mountain of soured loans and troubled mortgage-backed securities.

Some industry officials said that participation by the private sector may be harmed because potential investors will now be worried that the government will change the terms of the deal or impose new restrictions because of the current political backlash against Wall Street.

Hedge funds and other big investors are likely to be more leery of accepting the government's enticements to purchase these assets, fearing tighter government restraints in such areas as executive compensation.

The effort to deal with toxic assets is the administration's latest initiative to tackle the financial crisis.

Other programs cover mortgage foreclosures; lending to small businesses; unfreezing the markets that support credit card, student loan and auto debt; and testing of the 19 largest banks to ensure they have enough reserves to withstand an even more severe recession.

In addition to unveiling his plan for toxic assets, Geithner, who came under criticism for his handling of the AIG bonus issue, is expected to put forward next week the administration's proposals to overhaul the government's current financial regulatory structure.

President Barack Obama said this past week that this plan will include a proposal to give the administration expanded authority to take control of major troubled institutions that are deemed too big to fail because their collapse would pose a risk to the entire financial system.


Copyright 2009 The Associated Press.

[dps]

No smilie at this God-forsaken excuse for a forum can adequately express my disgust with our government.

[DGuller]

This has been on the table for at least half a year.  The fundamental problem with this is that these assets are toxic because they cannot be priced, or so it is thought.  So then how would the government know how much it should pay for them?  Pay too little, and you won't help, and banks would probably not sell.  Pay too much, and you're directly subsidizing the banks.

[The Minsky Moment]

The reference to "public-private partnerships" means that Obama is endorsing Lucian Bebchuk's plan, an outline of which can be found here:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1341939

Unfortunately, I think the premise is flawed.  Bebchuk's plan is based on his belief that the basic problem in the market for troubled asset is a liquidity problem -- potential buyers simply don't have the free cash available to buy because it is still all tied up in illiquid assets.  However, while there still are liquidity issues, the Fed has already ameliorated this problem and it just isn't accurate.  In fact, there is a lot of private fund money sitting on billions in uninvested cash.  to give one example - one of the major vulture investors out there -- Leon Black at Apollo -- is sitting on over $10 billion in cash but in a recent interview he expressed the view that we haven't hit bottom yet and recovery is at least 12-16 months out.  I.e. the vultures aren't sitting on the sidelines for lack of liquidity, they are sitting b/c they think valuations are still falling and want to take maximum advantage.  Bebchuck's plan doesn't address it.  The aggregator bank plan, which he trashes, does.

[jimmy olsen]

The reference to "public-private partnerships" means that Obama is endorsing Lucian Bebchuk's plan, an outline of which can be found here:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1341939

Unfortunately, I think the premise is flawed.  Bebchuk's plan is based on his belief that the basic problem in the market for troubled asset is a liquidity problem -- potential buyers simply don't have the free cash available to buy because it is still all tied up in illiquid assets.  However, while there still are liquidity issues, the Fed has already ameliorated this problem and it just isn't accurate.  In fact, there is a lot of private fund money sitting on billions in uninvested cash.  to give one example - one of the major vulture investors out there -- Leon Black at Apollo -- is sitting on over $10 billion in cash but in a recent interview he expressed the view that we haven't hit bottom yet and recovery is at least 12-16 months out.  I.e. the vultures aren't sitting on the sidelines for lack of liquidity, they are sitting b/c they think valuations are still falling and want to take maximum advantage.  Bebchuck's plan doesn't address it.  The aggregator bank plan, which he trashes, does.

What's the aggregator bank plan and how would it work?

[The Minsky Moment]

Agg Bank - government capitalizes a bank which buys up assets.

It operates off the premise that the government not only has a different liquidity constraint as compared to private funds, but also a different time horizon.  Fund managers need to show significant gains within a few years.  the government can wait out decades if necessary.

[Razgovory]

Agg Bank - government capitalizes a bank which buys up assets.

It operates off the premise that the government not only has a different liquidity constraint as compared to private funds, but also a different time horizon.  Fund managers need to show significant gains within a few years.  the government can wait out decades if necessary.

Hey, Geitner is still looking for people to fill out positions.  Nobody else wants the Job.  Why not see if they'll pick you.

[The Minsky Moment]

Hey, Geitner is still looking for people to fill out positions.  Nobody else wants the Job.  Why not see if they'll pick you.

The barrel hasn't been scraped anywhere near that far down to the bottom.

Besides I would never agree to submit myself to the vetting process in place these days, for the dubious privileges of taking a massive paycut, and of getting to give testimony (or defend myself from) the inevitable special counsel investigations to come.  Congress and the press have done their best over the last 50 years to make public service totally unpalatable to rational people. 

[Faeelin]

This has been on the table for at least half a year.  The fundamental problem with this is that these assets are toxic because they cannot be priced, or so it is thought.  So then how would the government know how much it should pay for them?  Pay too little, and you won't help, and banks would probably not sell.  Pay too much, and you're directly subsidizing the banks.

But aren't we already subsidizing the banks?

[jimmy olsen]

Was watching Dateline do an expose on the mortgage mess and even though I've read it all before on Languish, seeing real people admit how they screwed the system and the whole economy was just so infuriating.  >

We need a better angry smile.

[DontSayBanana]

I.e. the vultures aren't sitting on the sidelines for lack of liquidity, they are sitting b/c they think valuations are still falling and want to take maximum advantage.  Bebchuck's plan doesn't address it.  The aggregator bank plan, which he trashes, does.

Dead right. "Cash is king." I've heard this confirmed through several quarterlies that I've been working on.

[Admiral Yi]

But aren't we already subsidizing the banks?

We're subsidizing the banks' creditors.

[KRonn]

Hey, Geitner is still looking for people to fill out positions.  Nobody else wants the Job.  Why not see if they'll pick you.

The barrel hasn't been scraped anywhere near that far down to the bottom.

Besides I would never agree to submit myself to the vetting process in place these days, for the dubious privileges of taking a massive paycut, and of getting to give testimony (or defend myself from) the inevitable special counsel investigations to come.  Congress and the press have done their best over the last 50 years to make public service totally unpalatable to rational people.

Sad, but much truth to it. This stuff is nastily political too, and the feeding frenzy over just about anything in someone's background is just nuts. I must admit I was a bit put off by Geithner's confusion over his own taxes, while at the same time I tried to keep in mind the microscope we put appointees under and realize that some of the things found are not that big a deal, but add to the frenzy.

[The Minsky Moment]

Now that I have seen more details about the Treasury Plan, I have to revise some of my earlier comments above.  The plan is still probably a bad idea but for different reasons.  I had assumed based on the summary description that they were adopting the Bebchuk plan.  But Treasury is agreeing to provide a far higher degree of nonrecourse leverage than Bebchuk recommended.  Bebchuk suggested the something like 40% private equity participation might be reasonable, or alternatively, 25% private equity and some additional percentage of private financing that would be on par with the debt piece.   But the Geithner plan involves a private equity contribution of only 7 percent.

What this means is that for every say $1 million of assets purchased, the private party only has to put up $70k (71,500 to be exact).  If the asset value doubles in value, the private investor takes away $500K, for a very nice 700% return on investment.  If the asset value instead halves in value -- or even goes to zero -- the private investor loses only the 70K initial investment.  That is a very asymetrical risk-reward proposition.

The "good" news is that if the competitive aspect of the proposal works as planned, the private investors will have real incentives to bid high for bank assets, and thus help recapitalize the banks.  The bad news is that the vast bulk of the risk of loss will be borne by the taxpayer.  If there are significant losses, the taxpayer will be utterly soaked.

[KRonn]

Ok guys and gals, these will no longer be called "toxic" assets, but will be renamed and repackaged as "legacy" assets. Lol... I heard that on tv news this morning.

In any event, apparently this is seen as a good idea by some. I don't know really; it's an idea that's been out there for a while and probably represents the lion's share of the problems in the financial industry. No idea how these rather nasty assets can be invested in, but we'll see.

And damn, I'm still just pretty angry over how some of this crap came to be, having read more of how mortgages, including sub primes, and then mortgage securities were done up, passed along and invested in.