Is the main goal of the toxic asset plan to get the market to price the assets?

[CreekDog]

that's the thread i'm seeing in the plan.

the government will buy the toxic assets after the private investor kicks in and bets on its value. the government will reap the return at the same rate as the private investor.

so if the market undervalues some toxic assets (not every mortgage on my street is going to default, most won't), then the private investor will pay less for them and the government will buy based on what the private investor thinks it's worth.

so it seems like the plan is designed to get the market to properly price assets, or at least make it in the investor's best interest to price them properly.

the lack of agreed-upon valuation of assets seems to be a big stumbling block on the credit front.

my take on this is that those here saying that:

1) we should let the banks fail
2) we should nationalize the banks
3) we are paying too much for the assets

my take is that those 3 opinions are not answering the question that Geithner's plan seeks to deal with. the "price" of assets. Geithner's plan seems to be based on the hypothesis that the "unknown" nature of the mix is putting investors in a holding pattern and until we start pricing these things investors are going to hold as much of their cash as possible.

anyone want to talk about this approach to our problems? that is assuming that pricing of the assets is the main problem? that's what i'm taking from this plan.

[ayeshahaqqiqa]

1. Your post is the first one that really explains what is happening

in words I understand. It would seem to me that each case would have to be taken into account to price things properly. That's not what has happened in the past, and that is why we're in the mess we're in. Those who wish to save capitalism have got to see this as the lifeline needed to get things going right. Frankly, if this doesn't work, we'll have to nationalize, I think, because we can't trust the markets to ever price things fairly.

[CreekDog]

2. and if the government priced the assets on its own, the market might not trust those decisions

this forces the market to decide and only hooks the government at a share price that the private investor is willing to hedge with his own money.

even if the government could accurately price these, the market might not believe those valuations. further, price by definition is what the market sets, not what the government dictates.

thanks for your response.

[Beetwasher]

5. FDIC Is Mediating The Process To Make Sure The Prices Are "Reasonable"

The securities are being auctioned (By FDIC), so the market will set the prices to a certain extent, HOWEVER, the FDIC will have MAJOR input on the maximum price that can be paid if you are using government money. There will be a "cap" of sorts that will be dependent on the FDIC's assessment of each instrument auctioned (THIS IS MAJOR!!!! We will finally have a good idea of their actual worth!) and a debt-equity ratio.

With proper oversight this will ensure that the private investors don't pay hyper-inflated prices using government loans. The prices paid will hopefully be reasonable.

Now, if the banks don't want to sell at reasonable prices, they will be free to hold on to their securities and deal w/ the fallout (bankruptcy and nationalization?).

[ayeshahaqqiqa]

7. Yep, Feds are making the market behave

like training a child to act responsibly.

[Tigermoose]

3. And Nationalization is not a magic bullet

Some people just want to wave the magic nationalization fairy wand and pretend that will fix everything. It doesn't. The government would still have to find a way to pay for the trillions upon trillions of dollars it would inherit if it "nationalized" the banks. And its not like the U. S. government can magically create the beuracracy needed to run a nationalized banking system. At least with Geitner's plan, we get private participation and the very good chance of not losing all that much if we manage to stabilize the system and restore confidence.

[Political Heretic]

12. No one is talking about that kind of nationalization

We are talking about what the United States has ALREADY DONE before in the midst of a financial crisis. One that wasn't allowed to get as bad as this one because the action was taken more swiftly.

We're talking about addressing insolvent banks, not solvent ones.

"It goes like this: the government secures confidence in the system by guaranteeing many (though not necessarily all) bank debts. At the same time, it takes temporary control of truly insolvent banks, in order to clean up their books.

That’s what Sweden did in the early 1990s. It’s also what we ourselves did after the savings and loan debacle of the Reagan years. And there’s no reason we can’t do the same thing now."

Note that's not talking about nationalizing all banks nor is it talking about making it permanent.

[Tigermoose]

16. How do you define "solvent" vs "insolvent"?

I think many people here are assuming the banks are insolvent.

The assets may "look" toxic, but if the bank doesn't try and sell them in the down market, then they don't have to write them down on their balance sheets. Thus, the bank is not insolvent until it is forced to sell its assets in a down market. The only reason the bank would be forced to sell assets is if there was a "bank run" similar to what happened to Lehman Brothers. But the government has stepped in and committed itself to backing all "troubled" banks. Therefore, there has not been a bank run. Therefore the banks do not have to sell their assets in a down market. Therefore, if Geitner and Obama can get these assets to "price" at market that isn't too terribly low, then the banks can still remain solvent.

I do not believe the U. S. goverment beuracracy has the capacity to nationalize major internationalized banks.

[KittyWampus]

20. solvent- not holding assets worth a fraction of what gamblers pretended they were worth

[Tigermoose]

24. Here's an example I think that will make this clear.

You buy a home for $400,000. The market for homes in your area hits tough times. If you had to sell your home in the current down market, you figure you probably would only make $300,000. Sure, looks bad. But if you wait a few years, the real estate market might go back up and your home is worth $400,000 again. So why would you sell your home when the market was down and be forced to "eat" $100,000? Some possible reasons could be, you lost your job, you had to move etc. The banks are in a similar situation. They have assets that have lost a lot of value. But just because you have some kind of preconception that the value "is" down doesn't mean they have to mark it down on their balance sheet. They only have to do that if they for some reason are forced to sell their asset.

[KittyWampus]

19. so waving the magic "pretend these assets are worth something" wand is better?

you are in denial.

Just because a bunch of gamblers decide to gamble more on crap they already wasted money on?

Without any REAL accounting of what that crap is worth?

[Beetwasher]

21. The Assets ARE WORTH SOMETHING

90-95% of the mortgages in these securities are current and solid. And Geithner's plan is to ASSESS them before the auction to determine their value.

[Political Heretic]

29. Where's your statistic come from?

[Beetwasher]

31. The National Avg Foreclosure Rate was Under 2% In 2008

Unless you think the mortgages in the MBS are somehow abnormal, they should roughly correspond. It's a conservative estimate based upon the average and I'm factoring in an increase plus each MBS will deviate somewhat. So 90-95% is a conservative estimate. The fact is, we don't know for sure what the rate is in each individual MBS (yet), but it's a good bet it's not going to deviate too much from the average.

http://www.cbsnews.com/elements/2008/02/12/business/map3823166.shtml

Real estate foreclosures in the U.S. were up 81 percent in 2008 and up 225 percent from 2006. The overall rate in the U.S. was 18.4 per 1,000 households. Sixteen states ended the year with foreclosure rates of more than 15 per 1,000 households.

[EmilyAnne]

37. Some are saying they are worthless, some are saying they are overvalued, some are saying that

Geithner himself has them overvalued.

Krugman says that Geithner has them overvalued and that he is going to pay for them accordingly.
He also says that the reason they haven't been sold is that no one wants to buy them.
If Geithner's plan is to match the value that is set by the market, then it seems that the market that sees them as overvalued right now will see them as overvalued when they bid, bringing the price down and addressing the overvaluation.

Does this make sense to you?
I am not saying its right and I am not certain about anything because, quite frankly, just when I am about to form an opinion, along comes another editorial, another factor I hadn't considered or even known to consider, another connection, another etc. that just leave me with more and more questions.

Do you think that the gambling on these assets is what has overvalued them and that now, despite the long absence from this sort of transaction, the investors will once again make a gamble on those same assets without demanding a dive in their purchase value?

[Thrill]

4. Let the Banks fail and you can kiss Obama's entire term away

He won't be able to get shit down. And say hello to a Republican President

[Rosa Luxemburg]

34. I don't think the rest of the world's finance system would like that either

[CoffeeCat]

6. Ok my head hurts...

First off, I'm not even sure what the trillion is buying.

There are bad mortgages that will never be paid off. Those have been bundled into mortgage-backed securities. These
mortgage-backed securities contain some good loans, some bad (toxic) loans.

Is the trillion to buy the bad loans out of these mortgage-backed securities--thus detoxifying the mortgage-backed securities?

Or...are we buying the whole bundle--the entire mortgage-backed security?

As far as pricing...I don't know how in the hell a price for this stuff is figured. The bad mortgages have no value. However
the mortgage-backed securities (that contain some bad mortgages that won't be paid off) have some value because there are some good
loans in those bundles.

Are we relying on the banks to set the price? If so, that seems nutty.

Also--are we really, really sure that one trillion is enough to cover all of the toxic assets out there? I'm not.

I'm sorry if I didn't answer your question--by adding more questions. I'm just trying to follow the madness.

[CreekDog]

9. it's the contamination that has left these assets with almost a zero price

and so if you try to get a jumbo loan mortgage (not insured), that all proper underwriting indicates you can and will pay off --you can't get that loan, or can't get it at any reasonable price.

this is in part because lenders/investors are holding onto their cash because they can't price the set of securities your loan would be bundled with, even though your loan alone is not really worthless.

but the effect of not knowing prices your loan very low because there is no demand but that is artificial.

that's my take.

[HamdenRice]

8. The main goal is someone holding them until they are properly valued

as well as recapitalizing the banks.

Geithner's theory, which I think is half (but only half) true is that many mortgage securities are worth more than the market is willing to pay for them. That's a complicated phenomenon that has to do with valuing securities by discount to present value and ignoring the costs of legal defaults.

Basically if a $10,000 mortgage backed security is paying regular interest and isn't likely to default, or has legally defaulted but is still paying on time, but the market is so risk averse that it will only pay $3,000, then there is a difference between market price and value.

This causes the banks to seem more insolvent than they are. If someone can pay the banks some amount higher than $3,000 and hold the assets until the market prices them rationally, that (1) recapitalizes the banks, and (2) someone gets rewarded for holding the assets until they are priced at or near $10,000.

Geithner's plan is frankly insane. The government will ask hedge funds to put up about 7 cents on the dollar and will lend them the rest to buy the securities. When the assets go up, the hedge funds will make hundreds of billions -- most of the profits. If the assets don't go up, the federal government takes all the losses.

It would make much more sense to forget the hedge funds and just take the assets on the federal government's books. Then when the assets go up in price the taxpayer gets all the benefit. The banks can be more easily and efficiently recapitalized just by the Feds buying common stock and/or buying the assets directly.

[CreekDog]

10. but what if the hedge funds account for a significant portion of current market value?

hedge fund money is contaminating the entire economy.

does your idea deal with that?

[HamdenRice]

13. Not sure I understand your question

Hedge funds are privately held funds that are subscribed to by institutional investors and very wealthy people.

The equity ownership of hedge funds is completely different from the toxic assets, which are mostly mortgage backed securities.

[girl gone mad]

43. By design, we are overpaying for the assets.

That's built in to the auction plan. What's more, assume all of the risk and from what I can see, there are no curbs in place to keep the banks from gaming the system.

I have my doubts about whether the banks will be willing to sell, even with this ridiculous giveaway. They seem to want full value for these assets, and the fact that some counterparties were able to get face value under TARP has incentivized them all to hold out until they get it.

ETA: your "hedge fund money contaminating the economy" comment makes no sense to me. I meant to reply to you a bit upthread.

[Beetwasher]

15. Your "Plan" Is Not Workable Or Pragmatic At This Point In Time

Who would manage these assets for the government? Something needs to be done as soon as possible to stabilize the system. What you're suggesting would take a long time to set up. It would require creating a whole new division at treasury or FDIC (if in fact that's where the responsibility would land) with thousands of new employees. It's not practical at this point.

[HamdenRice]

25. It's less work, more practical and the system is already in place. Check this graphic

Keep in mind that the Fed has basically already put everything in place. The Fed has already been lending against, and taking as collateral, the toxic assets. If the assets need to be managed more intensively -- a good idea, eg, negotiating with lenders -- they've already nationalized Feddie and Fannie, which have the largest professional capacity to do this of any financial institution in the world. The FDIC has 70 years experience taking over, recapitalizing and selling banks.

So Geithner is proposing creating an entire new set of institutions that are untested when all the necessary institutions are already in place.

[Beetwasher]

26. No, It's Not In Place To Handle Assets On This Scale

Yes, they've nationalized Freddie and Fannie, but to handle so many more would be beyond their capacity at this point. Nationalizing Fannie and Freddie took up a LOT of resources. FDIC doesn't have the capacity right now.

[girl gone mad]

46. Why not?

Of course they have the capacity. This is the Federal Government you're talking about.

[Beetwasher]

57. No They Don't, Not Right NOW

The whole Federal government would not be involved in this, only portions of it (Treasurey/FDIC), and in order to deal w/ managing the large amount of securities we're talking about here, they would have to increase their capacity to manage these sorts of instruments by a HUGE amount, that would take time to put that bureaucray in place. This needs to be done SOONER not later.

So yes, the gov't could do it and marshall the resources, but it would take time and it's not practical. Time is of the essence.

[Tigermoose]

18. So what's your hangup?

"When the assets go up, the hedge funds will make hundreds of billions -- most of the profits. If the assets don't go up, the federal government takes all the losses."

Yes, that's the bet Geitner is making. He is betting that if the federal government reduces the risk, private investment will participate and the assets can be sold off at a price that will prevent bank insolvency.

Some people don't think this is "fair." Welcome to pragmatism.

"It would make much more sense to forget the hedge funds and just take the assets on the federal government's books. Then when the assets go up in price the taxpayer gets all the benefit. The banks can be more easily and efficiently recapitalized just by the Feds buying common stock and/or buying the assets directly."

I do not think that the U. S. government can pull this off. Why would the price of the assets go up if the U. S. government takes them over? I don't see how this offers a market based incentive that would lead to greater asset prices. I think this solution would just lead to the U. S. government holding a lot of undervalued assets that they cannot sell for fear of deflating the market prices of the assets held by the banking system. I don't think the market would be able to fairly value assets if the U. S. government has taken ownership of a major portion of the assets.

[leftofthedial]

11. objective #1 is to socialize the risk

privatize any profits that might be lurking in this newly valued "market"

[Political Heretic]

14. EXACTLY. Thank you for speaking the truth.

[Tigermoose]

17. Yes. That's it exactly. Get over it.

If it prevents a global banking system collapse, I could care less if people make money over it. Trust me, its a bargain for the U. S. taxpayer compared to the alternative.

[Political Heretic]

28. That's just horse shit

I care if people are making money over it when there are ways to prevent a "global banking system collapse" that don't involve the fleecing of America - so do most Americans - and you should too.

[girl gone mad]

48. The global banking collapse has already happened.

Now we're just playing "Weekend at Bernie's", hoping no one notices that we're carrying a dead body around.

[amborin]

22. yes, & bad banks can bid up each other's bad asset prices--taxprs pay big $$ for worthless assets

[Beetwasher]

23. Not W/ Government Money

The loans will be dependent upon an assessment before the auction and there will be limits based on that assessment.

"* Banks Identify the Assets They Wish to Sell: To start the process, banks will decide which assets – usually a pool of loans – they would like to sell. The FDIC will conduct an analysis to determine the amount of funding it is willing to guarantee. Leverage will not exceed a 6-to-1 debt-to-equity ratio. Assets eligible for purchase will be determined by the participating banks, their primary regulators, the FDIC and Treasury. Financial institutions of all sizes will be eligible to sell assets."

[amborin]

27. since large % of the assets are worthless, taxpayers will be paying lots for worthless assets

[Beetwasher]

30. Please Post A Source For That Claim, It's Bullshit

There is nothing to back up the claim that large % of MBS are worthless

[CreekDog]

33. i don't even think the worst of them are worthless

worthless is 0%.

worst case scenario:
say someone bought a house for 300k, no downpayment, then a year later refinanced the whole shebang at 125% of value when it was worth 350k (top of the market), so the new mortgage is 427k.

the owners walk out for whatever reason, last month and the value has dropped 40% from its peak to 210k now.

even in that disaster scenario, there is good reason to think the collateral backing the mortgage is worth about 50% of the mortgage itself, though it will sell for less because now people won't loan, people won't buy and there are other issues --but it's not worthless and under more conventional lending situations, it may even fetch 40-50%.

and i don't believe that scenario is even typical, but even in that scenario the value is not zero.

[amborin]

44. the collateral worth abt 50% of the mortgage? not in quite a few areas

of California, Arizona, and other places hard hit

have you read about some parts of Contra Costa County, for example?

Places that were selling new for 850K, 950K, etc....going on short sales for 300k

[CreekDog]

51. yes but that is not typical

and eastern CoCo county there were fairly few properties 800-900k that are going for 300k now.

meanwhile in Walnut Creek, things have fallen but not 60% like in Brentwood.

[girl gone mad]

49. Wait a second.

Some of them are actually worth less than zero.

New to the wonderful world of derivatives, I see.

[amborin]

45. & don't forget the real disaster looming: the commercial mortgages

commercial paper comes due april

that's partly why the fed floated all that new $$$$$ the other day: terrified

for large swaths of the country, the market value of commercial holdings has plummeted....

those securitized mortgages are not worth much

[girl gone mad]

50. yup.

CRE is going to get hit hard.

[Beetwasher]

58. You've Still Posted Not One Single Piece Of Data To Support That Bullshit

Not a single piece of data.

The VAST majority of mortgages in MBS are in good shape.

Here's data to support that;

http://www.realtytrac.com/foreclosure/foreclosure-rates.html

Foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 274,399 U.S. properties during the month, a 10 percent decrease from the previous month but still up 18 percent from January 2008, according to the RealtyTrac U.S. Foreclosure Market Report. The report also shows one in every 466 U.S. housing units received a foreclosure filing in January.
--snip--

Unless the rate in MBS are somehow far outpacing the national average, the vast majority of the mortgages in them are just fine.

So, where's YOUR data?

[EmilyAnne]

38. How are they worthless? Do you mean just extremely overvalued, or do you actually think many of

these are actually worthless?

[amborin]

52. both but especially the latter

[EmilyAnne]

32. Here's a question that probably seems quite dumb.

How many of these assets are actually tangible?
Things like foreclosed houses and land.

I think that a lot of these assets are just bundled loans and such.

Btw- I agree with your points. It doesn't mean they're right, of course, because this whole thing is way over my head no matter how much I read.
But, still, it make sense to me.
Some people seem to see Geithner's plan as totally outlandish, but it just isn't hitting me like that.

[Honeycombe8]

35. No. It's to free the banks of those assets, and thereby free up their $$$ to loan.

The banks have to get rid of those assets. They can't operate normally as long as they have them.

So those assets are being turned into an investment vehicle of sorts, only truthfully so (not like before, when they were sold as "good" assets when they weren't).

[Honeycombe8]

36. The govt is not going to pay the same for those assets as investors, is my understanding.

What I heard:

An investor pays, say, $6 for an asset worth $600. The govt puts in the other $100, and they end up paying $106 for it.

So even though it's a bad asset, the investor is enticed to buy it because of the extremely low price, backed by the fed govt.

The govt pays more than the investor, is what I heard.

[EmilyAnne]

39. Which makes sense that they will need to be enticed to participate, even if they are assholes.

Are your numbers just for examples or do you know how the ratio is set?
That seems like something that should be negotiable depending on the risk of a particular asset.

[Honeycombe8]

41. I just made those numbers up as an example. What I heard on TV...

they used an example....I took the $6 payment from the TV example. But I can't recall the rest of the numbers, and the pundit was just giving an example. So I don't know if he knew the ratio, either. But the point was that the fed govt would pay a lot more than the investor (taking on much more of the risk).

What wasn't clear to me, though, was if and when the investment pays off, does the fed govt recoup a lot more than the investor, since the fed paid a lot more for it?

[EmilyAnne]

42. I am sure it all breaks to give an advantage to the investors. That whole necessary evil thing.

And we know how much these guys like to gamble.
Thanks for the response!

[asphalt.jungle]

47. was it this?

http://www.pbs.org/nbr/site/research/learnmore/buying-toxic-assets-090320/

http://www.pbs.org/nbr/blog/2009/03/buying_toxic_assets_how_the_tr.html

[Redbear]

40. But don't we already know what the market thinks they are worth,

which is substantially less than the value the banks show on their books?

As I understand it, this new plan is entirely voluntary on behalf of the troubled banks and the question is why would they participate?

[Kurt_and_Hunter]

53. They'll participate because the plan is designed to over-pay

That's not a knock, just what it is.

A guy wants $1 for a scratch-off lottery ticket. A buyer is willing to pay $0.80

You say, "Hey, pay the dollar for it and if it's it's not a winner I'll pay you $0.50"

Suddenly the ticket is well worth a dollar. A "price" has been arrived at and the ticket changes hands.

It's not a sensible price, of course. Unless your top priority was getting it to change hands.

(Granted, you could have just bought the ticket yourself, but that would be "socialism"!)

[EmilyAnne]

55. Yikes! Everything was going so well until that last word! I got SCARED!!

Whew. OK, I'm better now.
Anyway, who will be determining the value of the lottery ticket (ie. toxic asset)?
Do you mean that the govt will set the value of the ticket, the investor will pay for it and the govt money will only come from paying for a lost gamble?
Is that really how this plan is set up?
I was under the impression that there would be shared ownership and that the value would be set through bidding.
Am I totally wrong here?

Thanks. And I really like metaphors for things like this.

[Gregorian]

54. My limited impression of this is that it is to avoid the alternative to doing nothing.

To avoid the passing off of them into what seems like an endless conveyor line into space, and to at least shine some light on them, get some life into them, and find someone to "own" them.

I'm really more or less guessing. But one thing that I vaguely feel might be the case is that perhaps not all of these assets are worthless. And that perhaps they're wanting to pump some life into these in order to almost force an investor to take some bad in hopes that there may be some good that comes with it.

Perhaps I shouldn't even post if I don't have a clue. But that's my gut feeling from listening to the news.

[EmilyAnne]

56. Keep posting your thoughts. I think most of us are in the same boat. This is very confusing stuff

because there will always be some factor that isn't taken into consideration.
We're all just trying to brainstorm here, I think.
I can't imagine that anyone here really, truly knows what would happen under Geithner's plan.
Even Geithner himself. Just a much more educated guess on his part, I assume. And hope.