Posts Tagged ‘toxic assets’

Trophies for everyone!

26 April 2009

“Too big to fail” evidently means “too big to fail a stress test,” too.  Although the results of the recently conducted stress tests on the nineteen largest U.S. banks won’t be made public until May 4, the advance word on Friday, April 24 was a Whole Lotta RosieFrom the NYT:

‘On Friday, the Federal Reserve reported that the banks whose books it had analyzed recently had enough capital to offset a raft of new losses, . . .’

So everybody’s solvent!  And those toxic assets are both nutritious and delicious!  I bet my students would love it if I could get Tim Geithner or the Fed to write my final exams — nobody would be allowed to fail.

‘. . . reinforcing the belief that the government would support the largest banks even if their financial health eroded, and buoying the stock market.’

Um, didn’t the government already do that, to the tune of $700 billion, not counting the Fed’s waves of loan/subsidies?  But of course those subsidies came with some conditions, from the understandable ($500,000 pay cap) to the asinine (don’t hire no foreigners), so the big banks are naturally eager to pay back those loans and return to looting.  As long as they can still count on a fresh round of bailouts when their losses become too gaping to hide, they’re in a perfect position.  The old mantra of “privatize the profits, socialize the losses” doesn’t quite convey the apparent duplicity at work here.  It leaves out the “fabricate the profits” and “hide the losses” steps.

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Rearranging the icebergs on the Titanic

3 April 2009

OK, the Geithner 2.0 plan officially looks wretched.  When I’m agreeing with the top Republican on the House Financial Services Committee, you know there’s a problem.  And the problem is not merely that the plan is a lousy deal for the taxpayers because it throws lavish subsidies at institutional buyers of toxic assets and grossly overpays the banks who would sell those assets; that’s all been said before.  The new problem is that it wouldn’t even remove toxic assets from the banking system! As the Financial Times reports:

‘US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury’s $1,000bn (£680bn) plan to revive the financial system.’

Can you say “playing with the house money”?  Unfortunately, that would be your house and my house.

It’s not completely clear that Geithner’s Treasury will allow this to go forward, as a Treasury official says that a bank’s supervisors will weigh in on whether the bank is healthy enough to buy assets.  But Geithner and Obama have implied that all of our big banks are fundamentally sound (shades of Herbert Hoover, John McCain, and Lake Wobegon), so I suspect that the ink is already wet on those supervisors’ rubber stamps.

Seems like we’ve made literally zero progress since Halloween 2008:  captured regulators attempt to prop up insolvent banks with hundreds of billions of dollar bills and won’t even consider that some of them might need to be closed.  Cue Mark Fiore’s “Zombie Bank” cartoon.

Geithner 2.0

23 March 2009

The fleshed-out Financial Rescue Plan hit the streets today, and the stock market loves it (Dow, Nasdaq, and S&P all up about 7% today).  As Dean Baker points out, why wouldn’t they? The plan is a huge gift to dodgy financial institutions, as the Treasury, Fed, and FDIC will be subsidizing gross overpayments for about $1 trillion (by Treasury Secretary Tim Geithner’s estimate) in toxic assets (or “legacy assets,” the latest euphemism.  I preferred “troubled assets” — sounds like a Capitol Steps number waiting to happen).

Paul Krugman has some unpleasant arithmetic about the plan, which takes as its starting point the way the plan would subsidize the private institutions (not individuals) that would buy those toxic assets.  Reportedly the subsidy would take the form of “non-recourse loans” in which the borrower (and toxic asset buyer) would only have to put up 15% of the price paid for the asset, the asset itself would be the collateral for the loan, and if the asset went bad the lender could default and owe only the bad asset.  Just like a 15% margin loan, except some margin loans allow the lender to demand repayment of the whole thing.

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Big zombies

12 February 2009

Must . . . eat . . . money

(hat tip: Julia)

Many economists have been warning that the net-worth problems of the banks are a lot bigger than the $700 billion that’s been allocated to deal with them.  Some have said a TARP II, TARP III, etc., to the tune of $2 trillion or so may be necessary to fix the banks once and for all.  Now Dr. Doom himself, Nouriel Roubini, says the banking system is just plain insolvent, and by about $3.6 trillion.  The specter of 1990s-Japan-style zombie banks in the U.S. is no longer a specter but a reality, it seems.

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Nationalize it, mon

10 February 2009

petertoshThe sticking point in the lingering credit crunch seems to be the remaining toxic assets (or dodgy assets, as the Brits call them) on the balance sheets of so many banks, especially the big problem banks that are getting government bailouts or are in line for them.

The sticking point in the policy question of how to remove those toxic assets as an obstacle to normal financial intermediation seems to be valuation, i.e., as Winston Churchill is said to have put it, a matter of haggling over the price.   No small haggle, this.   It’s often said that there is no market for these assets, and that appears to be true in the sense that there seems to be an unbridgeable gulf between what banks say those assets are worth (97 cents on the dollar?) and what they’ll fetch on the open market (38 cents on the dollar?  The numbers are from a New York Times article, 2 Feb. 2009, and refer to a particular mortgage-backed bond.  A division of Standard & Poor’s estimated the bond’s value at 87 cents or 53 cents under a less optimistic scenario. )  Treasury Secretary Tim Geithner’s plan for the remaining $350 billion of last fall’s bank bailout is due to be unveiled Tuesday, and advance word is that it calls for the Treasury to buy up a lot of those toxic assets and quarantine them in a “bad bank.”

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