A reminder about the value of Toxic Assets

[Kurt_and_Hunter]

A lot of TARP-type discussions bog down on differing views of the worth of these assets. They are difficult to value but their mysteriousness has been somewhat overdone.

Every asset we are talking about carries a specific value on the banks' books. Pile of assets X has a face value of 1 billion dollars. But it is unlikely to pay off in full. The bank knows this.

Asset X is marked at $300 million, 30% of par.

Someone wants to borrow money from the bank but the bank wants to hang onto their money because asset X may drop to zero and they'll need $300 million on hand or else may be considered insolvent.

The government says, "That's a bad situation. We want to help you. We will give you $300 million of nice new money for asset X and everything will be cool."

The bank says, "No, we want $600 million for it."

So the government says, "Fuck you. Are you high? Are you insane? To hell with you. We will put you in receivership and clean up your mess, since you have no interest in cooperating."

Actually, that's what a fantasy government says. Our government says, "Since it would be socialistic to solve this unilaterally I guess we'll have to come up with a way to pay you $600 million."

It is not a mystery what these assets are worth. They are worth what someone will pay for them. It is a mystery what they will be worth, but that goes for everything. (What will a share of GE be worth a year from now?)

The banks have already marked them to market price but think that either 1) they will be worth a lot more someday or, 2) they can hold up the federal government for a higher price.

For the life of me I don't know why congress did not create a method, short of receivership, where the government could force purchases of these assets from banks at the prices they are marked at. Unless sales are FORCED we are going nowhere on this issue.

[PBS Poll-435]

1. Um. ok.

[girl gone mad]

15. Another pbs poll-435 post with no content.

You are clearly a big fan of the bank bailouts, though you never seem to be able to make a case as to why.

[PBS Poll-435]

19. I have yet to see a big bank "bailed out"

TCPP is/was bullshit.

Things are looking pretty good as far as earnings are concerned.


Pretty happy that nationalization is not going to happen (as if it was ever a possibility. :rofl:)

[baldguy]

2. And also remember they're only "toxic" to the bank's ledger book.

To other people, it's their home.

[leftofthedial]

13. actually, to other people,

they are derivatives of derivatives of big stacks of paper representing the mortgages on their homes, that is, virtually irrelevant.

They're like IOU's that represent chips in a private poker game. They have no actual value at all.

[Redbear]

3. I think I've heard the phrase "high-stakes game of chicken" used.

It seems to me that a huge part of the problem is that for many of the assets 30% of par may be way too high.

[Kurt_and_Hunter]

5. I am willing for the government to assume that risk.

If we buy these things at some kind of legitimate contemporary price and they go south later, so be it.

But there's certainly no reason to pay a premium.

[ProSense]

4. Really?

At a recent breakfast with a dozen or so corporate and banking executives in New York, Treasury Secretary Timothy F. Geithner warned he would take a tough stance. Many banks, he suggested, believe the investments and loans on their books are worth far more than they really are, according to a person who attended the meeting.

Mr. Geithner said that was unacceptable. The banks, he said, will have to sell these assets at prices investors are willing to pay, and so must be prepared to take further write-downs.

link

You said:

For the life of me I don't know why congress did not create a method, short of receivership, where the government could force purchases of these assets from banks at the prices they are marked at. Unless sales are FORCED we are going nowhere on this issue.

That would be the Treasury's request for expanded authority

The government’s entirely reasonable and long overdue request for a resolution authority will set up runs on that authority. If the authority is not granted, the runs will be on the government’s low and failing ability to save banks - given that the trust of Congress has been lost and no more cash for bailouts is likely forthcoming (presumably until there are large further shock waves or until Goldman Sachs itself is on the line.)

more

[Kurt_and_Hunter]

6. I have certainly never criticized the Geithener request for expanded authority

My question is past tense: "For the life of me I don't know why congress did not create a method..."

And I still don't.

If Treasury finds a way to force sales I will applaud it.


I am modestly pro-plan and consider Geithner a capable guy pushed into an impossible political situation. But that does not require credulously accepting everything he says. Much of the reason I am sympathetic to him is that he is not a politician by temperment but is forced to say ridiculous politically-motivated things nobody believes.

For instance, the quote you cite... "The banks, he said, will have to sell these assets at prices investors are willing to pay"

As Biden likes to say, "No, you show me your plan and I'll tell YOU what your priorities are."

We have a real plan, so the real plan trumps Geithner's political "tough-guy" characterization of the plan.

The Geithner plan pays investors to buy the things at higher prices than "investors are willing to pay" and has no mechanism for making banks "have to" do anything.

And that's not the end of the world. I just don't like being lied to about it. And even I acknowledge the constant spin and mis-characterization may be necessary.

[ProSense]

8. You're all over the place

From your OP:

So the government says, "Fuck you. Are you high? Are you insane? To hell with you. We will put you in receivership and clean up your mess, since you have no interest in cooperating."

Actually, that's what a fantasy government says. Our government says, "Since it would be socialistic to solve this unilaterally I guess we'll have to come up with a way to pay you $600 million."

Now you say:

We have a real plan, so the real plan trumps Geithner's political "tough-guy" characterization of the plan.

Isn't that your fantasy? Also, that real plan is the Geithner plan.

[Kurt_and_Hunter]

9. Sorry, I can't even follow you any more

You seem to assume I have views I don't. Fair enough--there are often defined "camps" here on issues and I'm sure I also assume views on Y based on someones view on X.

I think the Geithner plan is hopeless as a method for dealing with toxic assets in an equitable way.

I think it is quite clever as a method of pumping a trillion dollars into banks.

The two are not mutually exclusive.

I'm pretty consistent on this... the plan cannot hope to meet its advertised objectives. But if the objective is just creating some money and giving it to banks it is an elegant way to do that in the face of difficult political realities.

I don't worry much about the deficit or the taxpayers... I am pro-reflation in almost any form. I supported TARP despite its problems. And I am moderately 51-49% supportive of the Geithner plan.

But I am not a soldier. I can support the broader effort without believing (or admiring) the attendant propaganda.

By all means, give this money to the banks. But please, guys... don't pretend it will establish a robust market for these assets or that the program isn't designed to overpay.

Ideally I would like to see forced sales at binding auctions. But if that is politically unfeasible, so be it. We will do what we can do at the moment.

[ProSense]

10. You can't follow your own comments? n/t

[girl gone mad]

16. Geithner doesn't need that authority for our Government..

to do what Kurt_and_Hunter is talking about, and there is no indication that when given that authority they will do a receivership. Geithner's PPIP is an elaborate plan which appears to have been designed to avoid receivership at all costs. The stress tests were a phony exercise designed to make the banks appear healthy so they could avoid receivership.

[uponit7771]

7. "They are worth what someone will pay for them", not to someone holding them to model and maturity

Also,...

"For the life of me I don't know why congress did not create a method, short of receivership, where the government could force purchases of these assets from banks at the prices they are marked at"

The valuation models for these were not based off prices of home but whether or not they're being serviced or paid on. The bank doesn't care that a persons car isn't worth what they bought it for it just cares if they're payin on said car...

[Dr.Phool]

11. "Toxic Assets" are worth slightly more than toxic sludge.

The banks and Wall Street perpetrated a fraud, selling mortgages that they KNEW had little chance of being paid. And they got AAA ratings on garbage.

They'd better take what they can get now. Meredith Whitney, among others, expects home prices to drop another 30%.

So, that means that their "assets are going down in value every day.

Their true market value is what they'll bring in the market.

[Romulox]

12. LOL at all of DU's "economists" lecturing us about what an unsalable asset is "really worth" nt

[grantcart]

14. The answer of your question in your penultimate sentence is

that since loans make up the overwhelming majority of bank assets on a balance sheet (paid up capital only a small 10% or so) that an accurate accounting of the value of these assets today, in the middle of a rushed 'fire sale' would have put 80% of the bank system (volume not companies) into technical insolvency and into the FDIC and crashed the system.

This is based on the fact that if you auctioned off all of the properties off at once or in mass that it would have taken the value of these products from, lets say 50%, to 30%. If they can slow down the panic, restore stability and develop a slower method of bringing these same products to the market they are likely to get between 50% and 70% of their current value. Many banks will still not have enough assets to balance their books but it will not bring down the entire system.

[Kurt_and_Hunter]

18. That involves an unwarranted assumption

If assets were liquidated to private parties in a rushed way then they would indeed be driven down in price. But I wasn't proposing open market forced liquidation to private parties at all.

(Ironically, the Geithner plan claims to be a greater threat to the banks than what I was saying. The banks would be sad if an actual efficient market for these things were developed. If the Geinthner plan did any od the things it has been sold as doing then it would drive down the prices of these things. Fortunately or unfortunately the plan will not do that in practice because the assets sold and pricing are determined entirely by the banks.)

The big banks are technically solvent today with these problematic assets marked at some value. This is what motivated the OP... people talk about these things as if they carry no current valuation at all. But they are pegged at some value that contributes to the current solvency of the banks.

If we relieve them of those uncertain assets at that value then they should be more solvent than less. Same balance sheet total, but with higher proportion of cash.

(If that statement is inaccurate then of course I retract everything I am saying. I am assuming that purchases at something in the ballpark of marked contemporary prices wouldn't render banks insolvent because if that were the case then they already ARE insolvent.)

Then the government can hold the assets as long as we wish to maximize price stability. We can hold the whole bag to maturity for all I care.

That was the reasoning behind TARP and would, IMO, have been excellent reasoning were the process not voluntary.

Hence the comment about coercive sales. I am not suggest these things should be dragged to the curb and auctioned by the sheriff. I am merely suggesting that we relieve the banks of these assets at prices determined by best current accounting practices (however someone wants to define that).

We can relieve them of the assets at non-blockade (presuming orderly long term disposal) market plus 20% for all I care. It's not about the fairness of price so much as having the ability to target a bank, clean it up and send it on its merry way. And as far as the toxic assets question goes, we should be able to do that short of nationalization or receivership with appropriate legislation.

Or with no new legislation... the FDIC seems to have powers akin the the "best interests of baseball" clause in all MLB contracts.

The thing is, there's no reason to think that the asset selection and pricing and timetable banks set up for their holdings bears any relation to the selection, pricing and timetable that is the best for the overall banking system.

And if we are going to be overpaying for these things (likely in any scenario) then we should, in exchange, at least have enough control over the process that we are overpaying for exactly the things we want based on our determination of where the problem is.

Only the government can take a big-picture view of the health of the system independent of the fiduciary responsibilities of the current executives. That doesn't mean the government would necessarily do it right, but nobody else can even pretend to do it.

[Median Democrat]

17. Its Like "Junk Bonds," They Aren't Literally "Junk," They Are Just High(Relative) Risk...

For example, Vanguard has a High Yield bond fund, which is more volatile then other bond funds, but it does yield more, but at a higher risk premium.