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32 Bid/84 Ask

Posted by Larry Doyle on April 3, 2009 11:14 AM |

Will banks sell toxic assets? This question is being asked ad nauseum. Investors have indicated a willingness to purchase at the right price. That price has moved up somewhat given the assistance of government financing (read this as taxpayer financing) and government assumption of losses (read this as taxpayer assumption of losses). Bank executives have indicated a willingness to sell, “at the right price.” Ken Lewis, CEO of Bank of America, made that assertion again this morning. 

What’s the right price? Well, a Bloomberg survey of investors and banks provided indicated levels of interest as to what the right price for certain of these toxic assets might be. Investors are willing to pay 32 cents on the dollar. Banks are willing to sell at 84 cents on the dollar. In Wall street parlance, between those levels one can drive many Mack trucks!!

Aside from the disparity in perceived value, banks now are further incentivized not to sell given the reprieve they received just yesterday in the relaxation of the mark to market. 

How can government officials provide incentive for the banks to sell these assets? If the banks retained an equity stake in the entity that purchases the toxic assets, the bank could effectively transfer the risk of ownership to the taxpayer while retaining the upside if the loans perform.  

Another maneuver could be if banks sell assets to each other. What is accomplished? Again, a transferral of risk to the taxpayer and a pronouncement that the assets traded at a decent level.

Each of those “sales” is nothing more than a charade. I can only hope government officials, including Sheila Bair, Secretary Geithner and others, ensure the process is robust. 

Why are investors only willing to pay 32 cents? The fear is that the level of default on the underlying loans will continue to deteriorate. Evidence of that occurring in all sectors of the economy – residential mortgages, commercial mortgages, and corporate borrowing – is prevalent. 
Bloomberg reports:

Mortgages modified in the third quarter failed at a faster pace than those revised in the first, and the delinquency rate on the least risky loans doubled, signs of deteriorating credit quality, U.S. regulators said.

Loans modified in the first quarter to help borrowers keep their homes fell delinquent 41 percent of the time after eight months, and second-quarter loans had a 46 percent default rate, the Office of the Comptroller of the Currency and Office of Thrift Supervision said in a report today. Third-quarter trends “are worsening,” the agencies said.

“For the year and this quarter, we saw the same trend that we saw last time: quite high re-default rates, no matter how we measured them,” John Dugan, the U.S. Comptroller of the Currency, said in a conference call with reporters.

While certain large asset managers are working closely with the government to make the asset sales work via the PPIP (Public Private Investment Program), other managers are beginning to shy away. Bridgewater, one of the largest and most well respected  managers, asserted just the other day that they will not participate due to the process and politics involved. 

Under the “for what it is worth” category, toxic asset bonds are trading in the realm of that 32 cents level everyday. Banks just don’t want to acknowledge that!!


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