Posted on 09/24/2008 2:03:13 AM PDT by RKBA Democrat
One of the aspects of the Paulson bailout bill that was not clear until today is that the Treasury has no intention of running a true action for the toxic assets on bank balance sheets. An auction would tend to set very low prices on the current value of mortgage-backed paper. Based on the few transactions which have taken place in the past, this might be as low as 30 cents on a dollar.
It has been widely assumed that banks would need to take large write-downs on the devalued assets, creating the need for them to raise more capital and further dilute shareholders.
All of those assumptions were mistaken.
In testimony today, Ben Bernanke described the plan by saying "it is designed to avoid forcing banks to sell or value their mortgage assets at a `fire-sale' price. In a harsher tone than he has ever used in testimony, Bernanke spelled out the benefits that would accrue when the government can buy these mortgage assets at close to "hold to maturity" prices instead of the "fire-sale price."
The plan puts taxpayers at a substantially greater risk than a true auction system. Buying these toxic assets inexpensively gives the Treasury a chance to profit from its risk if the paper appreciates in value over time, providing taxpayers some "upside" . The more that assets appreciate, the better the chance that the American public's long-term liability is low.
What has become clear is that Treasury plans to purchase bad assets from banks at prices very near their original value. The risk to taxpayers under this program would be tremendous. If housing prices continue to fall, so will the value of the paper the government has purchased. Under this set of circumstances the public could be at risk for underwriting the great majority of the Treasury's purchases and never having a chance to recoup their investment.
Buying troubled bank assets at above where they would be valued in a free market now and at a price which is near to the potential price when they mature is a great handout to the banks but undermines almost any chance that the Treasury will ever get any meaningful yield from the bailout.
Taxpayers lose any chance of being made whole
Sounds to me it’s like “the federal reserve” vs. “the American people”.
Paulson is a wall street insider. The game is rigged.
While this property has appreciated in value, those purchased at the height of the boom had their owners upside down in the mortgage for close to 20 years if they did not default or sell and take a loss.
Do we, the taxpayers, want to be upside down in assets(which already have depreciated) and are likely to depreciate even more if they are not well maintained, and which will likely not reach their current mortgage values for some time because the former 'house flipper' inventory is on the marrket as well, now that that is out of vogue?
Let the banks take a hit on the value of the paper they are holding and if we have to bail them out, do so at current (realistic) market value, not the inflated bubble valuations of the properties involved.
Exactly! I can't believe people can't see through this. Paulson will hold his current job for exactly 3 more months. And then he's back into the banking sector. WHO ARE THEY TRYING TO KID????
It sounds like the federal government is doing exactly what all the bank executives want. Not exactly a shocker.
If they pay what the assets are worth, the Treasury won't lose money, but many of the banks and related investors (such as credit default insurers) will be marked to market and have their equity wiped out. They may deserve it, but its more for the Fed and Treasury to deal with. So, either the Treasury loses the money in a centralized manner, or the Fed and Treasury deal with a ton of small fires caused by the forced sales.
Here's another thing to consider: If Treasury buys the securities, it becomes the indirect owner of the underlying mortgages, and therefore the homes. That would be a big chunk of nationalized housing. It doesn't take much imagination to see that housing doled out to favored constituencies down the road, does it?
DING DING DING...winner by TKO in the first round...
Even if some portion of this taxpayer-paid inventory did inflate the cost of maintenance, salaries of the monitor agency would more than eat that. If the government thinks there are $4 to spare they will spend $5. We have all seen that in action.
Nowhere in this bailout is there any talk of spending cuts. We will continue to give money to other countries and earmark special projects. If families don't have the money to buy something or to pay to buy on credit they just don't do it, but this novel idea never occurs in Washington with OPM.
Buying at the high side only props up the current valuations. It is designed to protect homeowners as well as those that hold notes on the properties. If a bank has mortgages with even 100,000 people that average $250K per note and the market goes down another 20% then that bank has to come up with cash to offset the loss in asset value on the books (Yes, I realize that the note doesn’t always equal value) or the risks associated with holding property that is now under water.
In short, the tax payer gets screwed on either deal.
Yes, indeed.
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