RSS Feed
Twitter
Facebook
Email
HomeWill 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!!
LD
Will they sell?
http://market-ticker.denninger.net/
http://market-ticker.denninger.net/
Don’t think for a second that that sort of conspiracy can not occur. In fact it has occurred on Wall Street before. I found out after the fact where sellers and buyers entered into transactions at prearranged elevated levels to influence market prices and then unwound those trades in private.
Never underestimate the lengths that desperate people with unscrupulous principles will go to try to make a buck.
Great link!!
LD, will all “toxic assets” show up on the balance sheets or will some banks still try to hide just how bad things really are?
Well, you can rest assured that all these banks are having very regular meetings with regulators of all stripes.
While it would be the stated intent to cleanse the system of all these assets, the reality is that some of the assets will likely remain buried. When a bank executive is facing the takeover of his institution he may go to great lengths to buy time in HOPES of the market improving or getting lucky.
Even if this program is a quick success there are trillions in assets that need to be addressed. That will likely take a few years to totally capture. The question that many banks may face is do they try to sell early on or will they hold out thinking the market will improve.
My feeling is if the bank can sell at a reasonable level, and move on with their biz that is the best move.
This will be very interesting.
If unregulated hedge funds are “investors”, will there be any disclosure requirement to participate in this food fight?
I am trying to figureout if this setup
is a closed loop and will turn in on itself like an economic blackhole. When ever the word private is used in the context of PUBLIC funds, I take on the
appearance of a pissed of porcupine
LD: Could you explain in simple terms why is it that if there is a loss
most of it is absorbed by the taxpayer ( 85% of it? I think it’s 50-50% for the first 14% percent of loss and then 85-15 for anything above that?) BUT if there is a gain then that is split only at 50%-50% . That’s crazy. Couldn’t then have imposed at least a 60-40 advantage since we are taking all of the risk?
I am confused and don’t understand why this is the “best” of all the Gov. options (per Geithner…)
Andy,
Our banking industry has upwards of $750 billion in embedded losses. Thus, these banks are faced with not only a liquidity issue (ability to sell) but a capital issue (price of assets sold).
The more advantageous terms that investors receive the greater the amount of liquidity (more people will want to buy)and capital (higher prices) will be injected into the system.
This program is not totally a “heads” investors win, “tails” taxpayers lose but it is in that direction.
Remember, the asset securitization business represents approximately 40% of total capital provided for lending. These markets will not restart right away but this program is an attempt to get them going.
The taxpayers are bearing the brunt of the risk. The color Mountainaires shared above is critically important. The govt MUST make sure that these transaction are arm’s length transactions, meaning buyers must be separate and distinct from sellers so all interested parties are protected.
Best of a very bad situation. My take is it will have moderate success. While some banks will benefit there will be others that will actually be forced into takeover in this process.
I did not realize this, thanks LD.
My limited understanding, other than listening today — says this is absurd. Why are we — as tax payers — having to take the loss. The moment we fund this beyond the 1:1 we are at a loss. The split of 50:50 on profits is ridiculous — since the investment is not 50:50. I view this as an adult robbing candy from a child.
As one CNBC guest said — Why are they not opening this up to everyone to invest and selectively choosing a small amount of people to participate. This is cost shifting to the American tax payer, as far as I am concerned.
Will trades occur at 50-55 cents on the dollar? If so, can banks absorb that hit to their capital base? NOT DONE.
If other factors are considered it may be that the banks will return yet again to the Fed’s trough to make up the difference. The government will let prices fall with inflated dollars to a point where the assets are viewed by investors as a steal. And they would be correct in this view.
As far as the windfall “clawback” (?), I take it that these investors will take a dimm view of any effort to retake the profits. I see the “mother of all right offs” will continue with out abatement.
It is interesting to note that the administration is using gallows humor bonds to balance the budget.
[...] The other day, I provided a cursory overview of the details embedded in the recently proposed Public-Private Investment Partnership, Will Banks Truly Sell these Toxic Assets? [...]