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Will Banks Truly Sell These Toxic Assets?

Posted by Larry Doyle on March 23, 2009 5:25 PM |

A quick summary of the plans proposed by Tim Geithner. Everything looks great on the surface and markets rally in anticipation, but VERY FEW transactions have occurred.

Let’s go over a few points:

1. Government provides cheap loans for investors to buy toxic assets . . . DONE.

2. Government provides backstop for investors to be somewhat protected against losses . . . DONE.

3. Investors express desire to purchase assets . . . DONE.

4. Banks express desire to sell assets to unclog balance sheets . . . DONE.

5. What price will spark transactions?  Banks believe assets are worth anywhere from 60-80 cents on the dollar. Investors put valuations at 20-40 cents on the dollar. Will trades occur at 50-55 cents on the dollar? If so, can banks absorb that hit to their capital base?  NOT DONE.

6. Will government utilize a clawback provision if investors purchase assets cheaply and make a windfall over the next year to two? TIME WILL TELL.

Check back with Sense on Cents on an ongoing basis to stay apprised of developments.

I  believe that behind the scenes, the government will be working the phones with both the banks and investors to promote transactions. Then expect a LOUD public relations campaign to highlight how the program is working. Look for investors to initially purchase assets from Citigroup given that the government is now effectively running Citi. Some transactions are likely already being set up by government officials. In essence, a few prearranged trades will occur to prime the pump!!


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