If the opportunity to make money on these depressed assets is so great, then why don't cash rich players with long investment horizons, like sovereign wealth funds, university endowment funds, and the Buffetts of the world, swoop down and buy these up? Is Federal Government better at assessing these assets than the professionals?
The capital will get going again when the holders of mortgage backed assets lower the price to market clearing prices. E*Trade sold their portfolio for about 30 cents on the dollar late last year. Indymac sold theirs for 20-45 cents on the dollar in June. Other players will purchase these bonds, but the prices have to be low enough to compensate for risk. So far, banks have been unwilling to do so, because they've been valuing the debt way above market value in order to maintain capital ratios.
The only way for the government's plan to actually "save" the banks is for them to buy the assets at well above market value. And that's unlikely to be profitable for taxpayers.
Are you telling me that you won’t buy shares in my Alaska bridge and my scheme for a water powered car?
Because of these previous sales, most of the banks have been required to mark these down to 30 cents on the dollar. That is how accounting works!!
I am not sure where you are getting that the government will pay above market values for these securities. All the press has said they will be buying them at current market values. If you have facts that show otherwise I would love to see it!
“The only way for the government’s plan to actually “save” the banks is for them to buy the assets at well above market value. And that’s unlikely to be profitable for taxpayers.”
Yes, I quite agree. What we have in the credit markets is the refusal of the banks to realize the (impaired) values of the underlying assets. Other banks, full of the same crap, are understandably unwilling to buy these assets, plus they need to shepherd their cash for the sake of their own balance sheets.
So, what Hank is proposing is for the US Govt in the form of the Tsy and the Fed to create its own “off-balance-sheet” entity, a giant black hole of toxic, radioactive debt, which the Tsy and Fed will not only assign arbitrary values to, it can command the holders of same to sell at those values and presumably, it can command other banks to BUY those assets at those arbitrary prices. It’s beyond extraordinary. It’s truly Alice in Wonderland.
By the way, the “$700 billion” limitation is an obvious canard, because it is “$700 bil at any one time”, which means that the entire debt of a seized FNM or FRE or anyone else can be cycled through the system, tranche by tranche, until trillions have been laundered. Even if the $700 billion is exceeded, the act exempts the actions of the Tsy from any administrative or legal scrutiny. So that’s that.
Now, the Tsy can literally ORDER the banks to unload their impaired assets at a price or prices the Tsy in and of itself, in its absolute and unassailable determination, deems appropriate. If some banks become instantly insolvent as a result, then those banks’ deposits become the likewise immediate problem for the FDIC. Where might that money come from?
In the end, I believe the banking world will divide into three classes: 1: The recently vaporized. 2: the barely functional, and 3: The FOH’s, the Friends of Hank, who will become the owners of enormous swaths these assets at fire sale prices. It’s likely to be the greatest transfer of wealth in human history. The Tsy can indeed “apparently” make money on these forced transfers by forcing an impaired institution to sell at 20 cents, then resell same for 30 cents to GS or JPM. (Lkely to be at the top of Hank’s party list)
However, when it’s all said and done, if the Fed and Tsy are committed to making foreign debt holders whole and committed to making ALL money market depositors whole (an absolute logical impossibility) and all FDIC-insured deposits whole, then I don’t see how the world does not see this as a massive money printing exercise.
And furthermore, if the Tsy can so drastically change the rules in the middle of the game, I fail to see how this maintains the US as a desirable place in which to invest. Because there will be no functional nor discernable definition of “cheap” or “expensive” any more; there will just be those unknowable (except for the FOH crowd) price points where Tsy blows the whistle and changes the rules again.
But they will either sell (at a "market/book" clearing price) to the FEDS or DIE. They will have no choice.
Well, exactly. There are no buyers for this stuff - nor for all of the excess real estate, nor for the huge amount of excess commercial real estate that has barely begun its own implosion.
With no buyers, the asset is valued at zero dollars. Someday, somewhere, some buyer will probably appear for some of the physical real estate, at least. But many of those homes in distant, undesirable suburbs are going to end up as crack houses and will ultimately get bulldozed. Value: zero dollars. And we own them, now. ;)
Well, that's the $64,000 question, so to speak. ;-)
Markets fluctuate, and there's nothing unusual in an individual stock going up or down 50% in a single year, although there may be no news that justifies either extreme.
And certainly markets have been unreasonably bearish before.
So, yes, it is conceivable from history alone that the pros are in a bear panic, and the proverbial blood is in the streets. However, as far as I can tell, we haven't yet seen a Hetty Green who will serve as an oracle, and plunk down her money to "buy cheap and sell dear."
My own opinion, and it's not a particularly informed one but at least it's free, is that we have finally hit a bottom of some sort.
When will we bounce off of it? I have no idea, but generally the deepest panics have lasted a year or so; some even just a few weeks. Unfortunately, the effects of panics have sometimes lasted many years; I hope that we are going to be wise enough to steer through these straits without going a years-long event.
The Japanese did a very successful fight against economic collapse, but even they stayed in the doldrums of deflation for many years. They had the good fortune of having vast amounts of cash wealth, and I think that was a very important feature that many economists missed in the economic analyses that I have seen of the Japanese recovery from their bubble.
I think that an RTC 2.0 is indeed probably the most feasible route out, but only history will tell.
As to reforms, I have to think that the people who design derivatives have to be kicking themselves over the obvious failures in their work. Clearly we have simply seen too many and too big of failures of these instruments in both the debt and credit markets to consider their designs to be sound.
It's also clear that any laws or regulations compelling lenders to make economically unsound loans, such as loans to people who cannot be expected to repay those loans, must be rescinded. Economic sense must be re-established: banks must be allowed to charge appropriate risk premiums on loans that are risky.