Treasury Unveils Details of Plan to Relieve Banks of Toxic Assets
By Neil Irwin
Washington Post Staff Writer
Monday, March 23, 2009; 10:05 AM
The U.S. government will offer hundreds of billions of dollars in equity and loan guarantees to investors who bid against each other to buy troubled assets from banks, officials said today.
The “Public Private Investment Plan,” a long-awaited but risky piece of the government’s financial stabilization strategy, will pour government money into private investment funds as a way to move loans from the balance sheets of banks to those of long-term investors.
Under the plan, the government and private investors will invest together to buy up between $500 billion and $1 trillion worth of real estate-related loans and securities from banks, using up to $100 billion in capital, about half of it from bailout funds.
The hope is that instead of hoarding cash in case those assets continue to lose value, the banks instead will be able to resume lending money once the toxic assets are off their books.
The government and private investors, meanwhile, will hold the assets for the long term, and stand to either make or lose money depending on how the economy does.
The stock market opened sharply up this morning, an early sign that Wall Street was optimistic about the plan.
Treasury officials are betting that the current low market prices for troubled bank assets are driven more by excessive fear than the reality of how the economy will perform, and that the new purchases will help kick-start those markets and return them to more normal functioning.
“This is a market that’s basically disappeared,” said White House economic adviser Christine Romer, who appeared on CNN and all three network morning news programs in advance of an off-camera briefing on the program by Treasury Secretary Timothy F. Geithner.
In an opinion piece in this morning’s Wall Street Journal, Geithner wrote that the new program will, over time, provide a market for these assets “that does not now exist” and will therefore “improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets.” Geithner wrote that the new government program should make it possible for banks to raise private capital, enabling them to return U.S. government investments that have come to them through the Troubled Assets Relief Program.
The program provides capital for new investment funds, matched with investments from private investors such as hedge funds. The Federal Deposit Insurance Corp. will guarantee debt issued by those private funds, meaning that lenders would likely view them to be as nearly as safe as lending to the U.S. government.
The funds will compete against each other at auction to acquire the troubled loans, a process which the government hopes will drive up the price enough to create a price floor for the questionable loans that have been dragging down the financial sector. Whoever wins the bidding will be able to use government money for half their equity share.
The funds can magnify their returns–and scale of borrowing–by borrowing money from the FDIC and Federal Reserve.
“It is going to be an open bid. That’s part of why we’re going in with the private sector,” Romer said. “They’re going to have money on the line just like we are and the whole idea is to make sure we don’t overpay for them.”
It works like this, according to a Treasury Department fact sheet. Imagine that a bank wants to sell mortgage loans with a $100 million face value. The FDIC would auction the loans to private bidders. Suppose the winning bidder offered $84 million. The private investor would put up $6 million, Treasury would put up $6 million, and the FDIC would guarantee $72 million worth of loans.
If investors select assets wisely, the assets prove to have good value over the long-run, the FDIC and Federal Reserve loans will be repaid, and the hedge fund and Treasury Department split the remaining profits in proportion to their original investment. If the investors choose poorly, or the assets fall significantly in value, the government shares in any loss.
The idea is to get those assets off the books of banks, where fear of further losses is leading institutions to hoard cash, and onto the books of long term investors who could lose money without causing broader economic damage.
Romer stressed that the program being discussed today must be seen in context of the other expensive programs the Obama administration is launching to stem the U.S. and global financial crisis.
“This is one more piece,” Romer said. “It’s also not going to be the only piece.”
Geithner is in the hot seat as he rolls out the new program, following a negative reaction to his initial financial rescue proposal in February and the outcry last week over bonuses paid to executives from the American International Group, which has received billions in taxpayer-funded government bailouts.
With today’s announcement, Treasury officials are aiming to reclaim some momentum in solving the breakdown in the financial system. One particularly treacherous hurdle for the plan is persuading the private investors to come to the table — a key to its success. After last week’s high-volume debate over bonus payments to AIG employees, hedge funds and private equity firms may be reluctant to play ball, for fear that the government will change terms of the deal retroactively.
I have excerpted a few salient paragraphs from an article written March 23, 2009, by Neil Irwin (Washington Post staff writer) and have made comments thereto:
The “Public Private Investment Plan,” a long-awaited but risky piece of the government’s financial stabilization strategy, will pour government money into private investment funds as a way to move loans from the balance sheets of banks to those of long-term investors.
Yes…., this is extremely risky to the taxpayers.
Under the plan, the government and private investors will invest together to buy up between $500 billion and $1 trillion worth of real estate-related loans and securities from banks, using up to $100 billion in capital, about half of it from bailout funds.
Effectively, the taxpayers will be at risk $13 for each $1 of private capital, thus whereas profits, if any (!), will be split 50-50, the risk is taxpayers, 92.857%, whereas the private partner, 7.143%. Very interesting………………
The hope is that instead of hoarding cash in case those assets continue to lose value, the banks instead will be able to resume lending money once the toxic assets are off their books.
It is difficult to hold back on this one, but I will try.
First…, cash is not the problem. The problem is EQUITY CAPITAL. Cash is not affected by further write-downs, whereas EC is affected, dollar for dollar. These problem ( toxic) assets are held on the books of the respective financial entities at a particular valuation. . If an asset is sold for less than its carrying valuation, the income statement will reflect the loss and that loss will reduce EC. If an asset is sold at the book valuation, there will be no effect upon EC, thus the only effect is that the sold asset will no longer be an ambiguous factor of EC. I believe that a better alternative to this single benefit would be to have the institution keep the asset and freeze the valuation as of a particular date, e.g., April 30, 2009. Those who continue to exclaim that these assets cannot be valued are foolish, at best. The rationale for freezing the valuation is that there have been substantial reductions, to date. Further, it would be logical for the government to guaranty any further decline in value, if the institution held to maturity or termination.
The stock market opened sharply up this morning, an early sign that Wall Street was optimistic about the plan.
Valid observation. Is the move due to hope or what?
Treasury officials are betting that the current low market prices for troubled bank assets are driven more by excessive fear than the reality of how the economy will perform, and that the new purchases will help kick-start those markets and return them to more normal functioning.
I stipulate to this comment. This offers more rationale as to why the banks should maintain these assets at the frozen valuations.
“This is a market that’s basically disappeared,” said White House economic adviser Christine Romer, who appeared on CNN and all three network morning news programs in advance of an off-camera briefing on the program by Treasury Secretary Timothy F. Geithner.
These people are, for lack of another word, scary! Well…., Geithner is the scary one and Romer is his puppet.
In an opinion piece in this morning’s Wall Street Journal, Geithner wrote that the new program will, over time, provide a market for these assets “that does not now exist” and will therefore “improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets.” Geithner wrote that the new government program should make it possible for banks to raise private capital, enabling them to return U.S. government investments that have come to them through the Troubled Assets Relief Program.
First, there is no reason to force a market for these assets, since time, as it usually does, will resolve the matter. If the “frozen” concept were accepted, there would no longer be any balance sheet ambiguities, and due to the significant recognition of impairment, the odds are monumental that, over time, the carrying values would be exceeded. His comment about private capital is naïve or disingenuous. The TARP purchase of 5% preferred stock virtually preempted private capital, i.e., no one, in his or her right mind, would invest at or near a 5% preferred.
The program provides capital for new investment funds, matched with investments from private investors such as hedge funds. The Federal Deposit Insurance Corp. will guarantee debt issued by those private funds, meaning that lenders would likely view them to be as nearly as safe as lending to the U.S. government.
Very interesting, very provocative, and very, very problematic.
The funds will compete against each other at auction to acquire the troubled loans, a process which the government hopes will drive up the price enough to create a price floor for the questionable loans that have been dragging down the financial sector. Whoever wins the bidding will be able to use government money for half their equity share.
Again…., very interesting, very provocative, and very, very, very problematic!
The funds can magnify their returns–and scale of borrowing–by borrowing money from the FDIC and Federal Reserve.
Absolutely and at the risk of further redundancy, EXTREMELY problematic!!
“It is going to be an open bid. That’s part of why we’re going in with the private sector,” Romer said. “They’re going to have money on the line just like we are and the whole idea is to make sure we don’t overpay for them.”
This would appear very funny, if this matter were not incredibly serious.
It works like this, according to a Treasury Department fact sheet. Imagine that a bank wants to sell mortgage loans with a $100 million face value. The FDIC would auction the loans to private bidders. Suppose the winning bidder offered $84 million. The private investor would put up $6 million, Treasury would put up $6 million, and the FDIC would guarantee $72 million worth of loans.
I hope that those who have read this far are sensing, intuitively, a very strange sensation. Note that the taxpayers are putting up $78 million, while private investors a mere $6 million. This “formula” can stimulate some interesting phenomena that would be very, very damaging to taxpayers and very, very beneficial to the financial institutions.
NOTE: Whenever a plan is devised, one of the most important concepts that must be applied is based upon the question as to what could go wrong.
What if: A financial institution sets up a partnership with the government per the parameters outlined, invests $714,285,714.29, with the government partner investing the same amount, and obtaining a FDIC guaranteed, non-recourse loan in the amount of $8,571.428,571.42, for a total fund of $10,000,000,000.00.
The institution has $10 billion face value of “toxic” mortgages, which have been written down to an impaired value of $6,000,000,000, which have a composite yield of 7.25%.
The partnership bids the face value for this group of toxic assets, believing that the 7.25% yield will create a much greater return since the partnership will borrow @ 4.50%, therefore, providing the “appearance” of a business purpose.
The worst-case result: The financial institution will have a gain of $4,000,000,000 on the toxic assets sold (book value @ $6,000,000,000), while its share of the partnership loss is limited to $714,285,714.29. Not too bad for a worst-case scenario! Of course, we, the People, lose $9,285,714,285.71.
The best-case result: The financial institution will have a gain of $4,000,000,000, and the partnership will be earning a current annual yield of 23.75% (calculation, below) with the “kicker” that another $4,000,000,000 will be earned upon payoff.
Based upon the above scenarios, does it not make sense that my idea of freezing the valuations and leaving these assets with the respective institutions would be a substantially superior plan for the taxpayers?
Food for thought………………….
Digest well…….
Calculation of Current Annual Yield:
$725,000,000 Interest Income on the $10,000,000,000 @ 7.25%
385,714,286 Interest Expense on the $8,571,428,571 @ 4.50%
$339,285,714 Net Interest Income
$169,642,857 The financial institution’s 50% share of net income
23.75% (Financial Institution’s Income divided by its $714,285,714 investment)
I have excerpted a few salient paragraphs from an article written March 23, 2009, by Neil Irwin (Washington Post staff writer) and have made comments thereto:
The “Public Private Investment Plan,” a long-awaited but risky piece of the government’s financial stabilization strategy, will pour government money into private investment funds as a way to move loans from the balance sheets of banks to those of long-term investors.
Yes…., this is extremely risky to the taxpayers.
Under the plan, the government and private investors will invest together to buy up between $500 billion and $1 trillion worth of real estate-related loans and securities from banks, using up to $100 billion in capital, about half of it from bailout funds.
Effectively, the taxpayers will be at risk $13 for each $1 of private capital, thus whereas profits, if any (!), will be split 50-50, the risk is taxpayers, 92.857%, whereas the private partner, 7.143%. Very interesting………………
The hope is that instead of hoarding cash in case those assets continue to lose value, the banks instead will be able to resume lending money once the toxic assets are off their books.
It is difficult to hold back on this one, but I will try.
First…, cash is not the problem. The problem is EQUITY CAPITAL. Cash is not affected by further write-downs, whereas EC is affected, dollar for dollar. These problem ( toxic) assets are held on the books of the respective financial entities at a particular valuation. . If an asset is sold for less than its carrying valuation, the income statement will reflect the loss and that loss will reduce EC. If an asset is sold at the book valuation, there will be no effect upon EC, thus the only effect is that the sold asset will no longer be an ambiguous factor of EC. I believe that a better alternative to this single benefit would be to have the institution keep the asset and freeze the valuation as of a particular date, e.g., April 30, 2009. Those who continue to exclaim that these assets cannot be valued are foolish, at best. The rationale for freezing the valuation is that there have been substantial reductions, to date. Further, it would be logical for the government to guaranty any further decline in value, if the institution held to maturity or termination.
The stock market opened sharply up this morning, an early sign that Wall Street was optimistic about the plan.
Valid observation. Is the move due to hope or what?
Treasury officials are betting that the current low market prices for troubled bank assets are driven more by excessive fear than the reality of how the economy will perform, and that the new purchases will help kick-start those markets and return them to more normal functioning.
I stipulate to this comment. This offers more rationale as to why the banks should maintain these assets at the frozen valuations.
“This is a market that’s basically disappeared,” said White House economic adviser Christine Romer, who appeared on CNN and all three network morning news programs in advance of an off-camera briefing on the program by Treasury Secretary Timothy F. Geithner.
These people are, for lack of another word, scary! Well…., Geithner is the scary one and Romer is his puppet.
In an opinion piece in this morning’s Wall Street Journal, Geithner wrote that the new program will, over time, provide a market for these assets “that does not now exist” and will therefore “improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets.” Geithner wrote that the new government program should make it possible for banks to raise private capital, enabling them to return U.S. government investments that have come to them through the Troubled Assets Relief Program.
First, there is no reason to force a market for these assets, since time, as it usually does, will resolve the matter. If the “frozen” concept were accepted, there would no longer be any balance sheet ambiguities, and due to the significant recognition of impairment, the odds are monumental that, over time, the carrying values would be exceeded. His comment about private capital is naïve or disingenuous. The TARP purchase of 5% preferred stock virtually preempted private capital, i.e., no one, in his or her right mind, would invest at or near a 5% preferred.
The program provides capital for new investment funds, matched with investments from private investors such as hedge funds. The Federal Deposit Insurance Corp. will guarantee debt issued by those private funds, meaning that lenders would likely view them to be as nearly as safe as lending to the U.S. government.
Very interesting, very provocative, and very, very problematic.
The funds will compete against each other at auction to acquire the troubled loans, a process which the government hopes will drive up the price enough to create a price floor for the questionable loans that have been dragging down the financial sector. Whoever wins the bidding will be able to use government money for half their equity share.
Again…., very interesting, very provocative, and very, very, very problematic!
The funds can magnify their returns–and scale of borrowing–by borrowing money from the FDIC and Federal Reserve.
Absolutely and at the risk of further redundancy, EXTREMELY problematic!!
“It is going to be an open bid. That’s part of why we’re going in with the private sector,” Romer said. “They’re going to have money on the line just like we are and the whole idea is to make sure we don’t overpay for them.”
This would appear very funny, if this matter were not incredibly serious.
It works like this, according to a Treasury Department fact sheet. Imagine that a bank wants to sell mortgage loans with a $100 million face value. The FDIC would auction the loans to private bidders. Suppose the winning bidder offered $84 million. The private investor would put up $6 million, Treasury would put up $6 million, and the FDIC would guarantee $72 million worth of loans.
I hope that those who have read this far are sensing, intuitively, a very strange sensation. Note that the taxpayers are putting up $78 million, while private investors a mere $6 million. This “formula” can stimulate some interesting phenomena that would be very, very damaging to taxpayers and very, very beneficial to the financial institutions.
NOTE: Whenever a plan is devised, one of the most important concepts that must be applied is based upon the question as to what could go wrong.
What if: A financial institution sets up a partnership with the government per the parameters outlined, invests $714,285,714.29, with the government partner investing the same amount, and obtaining a FDIC guaranteed, non-recourse loan in the amount of $8,571.428,571.42, for a total fund of $10,000,000,000.00.
The institution has $10 billion face value of “toxic” mortgages, which have been written down to an impaired value of $6,000,000,000, which have a composite yield of 7.25%.
The partnership bids the face value for this group of toxic assets, believing that the 7.25% yield will create a much greater return since the partnership will borrow @ 4.50%, therefore, providing the “appearance” of a business purpose.
The worst-case result: The financial institution will have a gain of $4,000,000,000 on the toxic assets sold (book value @ $6,000,000,000), while its share of the partnership loss is limited to $714,285,714.29. Not too bad for a worst-case scenario! Of course, we, the People, lose $9,285,714,285.71.
The best-case result: The financial institution will have a gain of $4,000,000,000, and the partnership will be earning a current annual yield of 23.75% (calculation, below) with the “kicker” that another $4,000,000,000 will be earned upon payoff.
Based upon the above scenarios, does it not make sense that my idea of freezing the valuations and leaving these assets with the respective institutions would be a substantially superior plan for the taxpayers?
Food for thought………………….
Digest well…….
Calculation of Current Annual Yield:
$725,000,000 Interest Income on the $10,000,000,000 @ 7.25%
385,714,286 Interest Expense on the $8,571,428,571 @ 4.50%
$339,285,714 Net Interest Income
$169,642,857 The financial institution’s 50% share of net income
23.75% (Financial Institution’s Income divided by its $714,285,714 investment)
How is this any different than me suing one of my agents because they leveraged their volume to get me to write a bunch of crappy risks that incurred heavy losses?
Look at this quote “to induce it to insure”
AIG still had the power of the purse, did they not? Was Countrywide holding a gun to their head? Did AIG not have the responsibility of due diligence?
How is this different than the agent/carrier example? An agent could easily use high premium volume “TO INDUCE [a carrier] TO INSURE” undesirable risks….. so is AIG suggesting a carrier should be able to turn around and SUE their agent for poor loss ratio?
PLEASE correct me if this is mistaken, but I just don’t get it. Is AIG not the one that makes the insure/don’t insure decision? Are they not the underwriter?
This is as ridiculous as “Hank” suing AIG over his equity losses.
So far, we’ve spent $700 billion dollars bailing out Wall Street. And what do we get? Banks throwing lavish parties, CEOs taking vacations on corporate jets, and now AIG’s fat bonuses.
BOTH OF THESE COMPANIES ARE CROOKS .COUNTRYWIDE HAD MY MORTGAGE THEY SOLD IT SEVERAL TIMES TO OTHER MORTGAGE COMPANIES ONLY TO BUY IT BACK WITH HJIGHER INTEREST RATE.FROM A 4.5 T0 A 10.0.SEVERAL TIMES THIS HAPPEN. NOW BANK OF AMERICA HAS IT.
ALSO AMERICAN GENERAL INSURANCE COMPANY NEED TO BE LOOK AT THEY SWITCH MY FAMILY LIFE INSURANCE POLICY.FORCE TO TAKE A LOAN THEN SWITCHED THE POLICY.WHAT CAN A CITZEN DO.NEED INFO.I HAVE BEEN TRYING TO TALK TO AN ATTORNEY FOR THE LONGEST WITHOUT ANY HELP AT ALL.ALSO UNUM PROVIDENT INSUARANCE CO. I AM RECIEVING BEFITS AFTER THEY CUT ME OFF BECAUSE OF THERE MISTAKE FOR OVER PAYMENT THAT SHOULD HAVE BEEN DO ME BECAUSE OF STOPPAGE OF MY FUNDS THAT CAUSED ME TO ALMOST LOSE EVERYTHING.I AM JUST NOW BEING PAYED AGAIN.STARTING NEXT MONTH OCT. 2009
We have updated our privacy policy to be more clear and meet the new requirements of the GDPR. By continuing to use our site, you accept our revised Privacy Policy.
Treasury Unveils Details of Plan to Relieve Banks of Toxic Assets
By Neil Irwin
Washington Post Staff Writer
Monday, March 23, 2009; 10:05 AM
The U.S. government will offer hundreds of billions of dollars in equity and loan guarantees to investors who bid against each other to buy troubled assets from banks, officials said today.
The “Public Private Investment Plan,” a long-awaited but risky piece of the government’s financial stabilization strategy, will pour government money into private investment funds as a way to move loans from the balance sheets of banks to those of long-term investors.
Under the plan, the government and private investors will invest together to buy up between $500 billion and $1 trillion worth of real estate-related loans and securities from banks, using up to $100 billion in capital, about half of it from bailout funds.
The hope is that instead of hoarding cash in case those assets continue to lose value, the banks instead will be able to resume lending money once the toxic assets are off their books.
The government and private investors, meanwhile, will hold the assets for the long term, and stand to either make or lose money depending on how the economy does.
The stock market opened sharply up this morning, an early sign that Wall Street was optimistic about the plan.
Treasury officials are betting that the current low market prices for troubled bank assets are driven more by excessive fear than the reality of how the economy will perform, and that the new purchases will help kick-start those markets and return them to more normal functioning.
“This is a market that’s basically disappeared,” said White House economic adviser Christine Romer, who appeared on CNN and all three network morning news programs in advance of an off-camera briefing on the program by Treasury Secretary Timothy F. Geithner.
In an opinion piece in this morning’s Wall Street Journal, Geithner wrote that the new program will, over time, provide a market for these assets “that does not now exist” and will therefore “improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets.” Geithner wrote that the new government program should make it possible for banks to raise private capital, enabling them to return U.S. government investments that have come to them through the Troubled Assets Relief Program.
The program provides capital for new investment funds, matched with investments from private investors such as hedge funds. The Federal Deposit Insurance Corp. will guarantee debt issued by those private funds, meaning that lenders would likely view them to be as nearly as safe as lending to the U.S. government.
The funds will compete against each other at auction to acquire the troubled loans, a process which the government hopes will drive up the price enough to create a price floor for the questionable loans that have been dragging down the financial sector. Whoever wins the bidding will be able to use government money for half their equity share.
The funds can magnify their returns–and scale of borrowing–by borrowing money from the FDIC and Federal Reserve.
“It is going to be an open bid. That’s part of why we’re going in with the private sector,” Romer said. “They’re going to have money on the line just like we are and the whole idea is to make sure we don’t overpay for them.”
It works like this, according to a Treasury Department fact sheet. Imagine that a bank wants to sell mortgage loans with a $100 million face value. The FDIC would auction the loans to private bidders. Suppose the winning bidder offered $84 million. The private investor would put up $6 million, Treasury would put up $6 million, and the FDIC would guarantee $72 million worth of loans.
If investors select assets wisely, the assets prove to have good value over the long-run, the FDIC and Federal Reserve loans will be repaid, and the hedge fund and Treasury Department split the remaining profits in proportion to their original investment. If the investors choose poorly, or the assets fall significantly in value, the government shares in any loss.
The idea is to get those assets off the books of banks, where fear of further losses is leading institutions to hoard cash, and onto the books of long term investors who could lose money without causing broader economic damage.
Romer stressed that the program being discussed today must be seen in context of the other expensive programs the Obama administration is launching to stem the U.S. and global financial crisis.
“This is one more piece,” Romer said. “It’s also not going to be the only piece.”
Geithner is in the hot seat as he rolls out the new program, following a negative reaction to his initial financial rescue proposal in February and the outcry last week over bonuses paid to executives from the American International Group, which has received billions in taxpayer-funded government bailouts.
With today’s announcement, Treasury officials are aiming to reclaim some momentum in solving the breakdown in the financial system. One particularly treacherous hurdle for the plan is persuading the private investors to come to the table — a key to its success. After last week’s high-volume debate over bonus payments to AIG employees, hedge funds and private equity firms may be reluctant to play ball, for fear that the government will change terms of the deal retroactively.
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/23/AR2009032300572_pf.html
I have excerpted a few salient paragraphs from an article written March 23, 2009, by Neil Irwin (Washington Post staff writer) and have made comments thereto:
The “Public Private Investment Plan,” a long-awaited but risky piece of the government’s financial stabilization strategy, will pour government money into private investment funds as a way to move loans from the balance sheets of banks to those of long-term investors.
Yes…., this is extremely risky to the taxpayers.
Under the plan, the government and private investors will invest together to buy up between $500 billion and $1 trillion worth of real estate-related loans and securities from banks, using up to $100 billion in capital, about half of it from bailout funds.
Effectively, the taxpayers will be at risk $13 for each $1 of private capital, thus whereas profits, if any (!), will be split 50-50, the risk is taxpayers, 92.857%, whereas the private partner, 7.143%. Very interesting………………
The hope is that instead of hoarding cash in case those assets continue to lose value, the banks instead will be able to resume lending money once the toxic assets are off their books.
It is difficult to hold back on this one, but I will try.
First…, cash is not the problem. The problem is EQUITY CAPITAL. Cash is not affected by further write-downs, whereas EC is affected, dollar for dollar. These problem ( toxic) assets are held on the books of the respective financial entities at a particular valuation. . If an asset is sold for less than its carrying valuation, the income statement will reflect the loss and that loss will reduce EC. If an asset is sold at the book valuation, there will be no effect upon EC, thus the only effect is that the sold asset will no longer be an ambiguous factor of EC. I believe that a better alternative to this single benefit would be to have the institution keep the asset and freeze the valuation as of a particular date, e.g., April 30, 2009. Those who continue to exclaim that these assets cannot be valued are foolish, at best. The rationale for freezing the valuation is that there have been substantial reductions, to date. Further, it would be logical for the government to guaranty any further decline in value, if the institution held to maturity or termination.
The stock market opened sharply up this morning, an early sign that Wall Street was optimistic about the plan.
Valid observation. Is the move due to hope or what?
Treasury officials are betting that the current low market prices for troubled bank assets are driven more by excessive fear than the reality of how the economy will perform, and that the new purchases will help kick-start those markets and return them to more normal functioning.
I stipulate to this comment. This offers more rationale as to why the banks should maintain these assets at the frozen valuations.
“This is a market that’s basically disappeared,” said White House economic adviser Christine Romer, who appeared on CNN and all three network morning news programs in advance of an off-camera briefing on the program by Treasury Secretary Timothy F. Geithner.
These people are, for lack of another word, scary! Well…., Geithner is the scary one and Romer is his puppet.
In an opinion piece in this morning’s Wall Street Journal, Geithner wrote that the new program will, over time, provide a market for these assets “that does not now exist” and will therefore “improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets.” Geithner wrote that the new government program should make it possible for banks to raise private capital, enabling them to return U.S. government investments that have come to them through the Troubled Assets Relief Program.
First, there is no reason to force a market for these assets, since time, as it usually does, will resolve the matter. If the “frozen” concept were accepted, there would no longer be any balance sheet ambiguities, and due to the significant recognition of impairment, the odds are monumental that, over time, the carrying values would be exceeded. His comment about private capital is naïve or disingenuous. The TARP purchase of 5% preferred stock virtually preempted private capital, i.e., no one, in his or her right mind, would invest at or near a 5% preferred.
The program provides capital for new investment funds, matched with investments from private investors such as hedge funds. The Federal Deposit Insurance Corp. will guarantee debt issued by those private funds, meaning that lenders would likely view them to be as nearly as safe as lending to the U.S. government.
Very interesting, very provocative, and very, very problematic.
The funds will compete against each other at auction to acquire the troubled loans, a process which the government hopes will drive up the price enough to create a price floor for the questionable loans that have been dragging down the financial sector. Whoever wins the bidding will be able to use government money for half their equity share.
Again…., very interesting, very provocative, and very, very, very problematic!
The funds can magnify their returns–and scale of borrowing–by borrowing money from the FDIC and Federal Reserve.
Absolutely and at the risk of further redundancy, EXTREMELY problematic!!
“It is going to be an open bid. That’s part of why we’re going in with the private sector,” Romer said. “They’re going to have money on the line just like we are and the whole idea is to make sure we don’t overpay for them.”
This would appear very funny, if this matter were not incredibly serious.
It works like this, according to a Treasury Department fact sheet. Imagine that a bank wants to sell mortgage loans with a $100 million face value. The FDIC would auction the loans to private bidders. Suppose the winning bidder offered $84 million. The private investor would put up $6 million, Treasury would put up $6 million, and the FDIC would guarantee $72 million worth of loans.
I hope that those who have read this far are sensing, intuitively, a very strange sensation. Note that the taxpayers are putting up $78 million, while private investors a mere $6 million. This “formula” can stimulate some interesting phenomena that would be very, very damaging to taxpayers and very, very beneficial to the financial institutions.
NOTE: Whenever a plan is devised, one of the most important concepts that must be applied is based upon the question as to what could go wrong.
What if: A financial institution sets up a partnership with the government per the parameters outlined, invests $714,285,714.29, with the government partner investing the same amount, and obtaining a FDIC guaranteed, non-recourse loan in the amount of $8,571.428,571.42, for a total fund of $10,000,000,000.00.
The institution has $10 billion face value of “toxic” mortgages, which have been written down to an impaired value of $6,000,000,000, which have a composite yield of 7.25%.
The partnership bids the face value for this group of toxic assets, believing that the 7.25% yield will create a much greater return since the partnership will borrow @ 4.50%, therefore, providing the “appearance” of a business purpose.
The worst-case result: The financial institution will have a gain of $4,000,000,000 on the toxic assets sold (book value @ $6,000,000,000), while its share of the partnership loss is limited to $714,285,714.29. Not too bad for a worst-case scenario! Of course, we, the People, lose $9,285,714,285.71.
The best-case result: The financial institution will have a gain of $4,000,000,000, and the partnership will be earning a current annual yield of 23.75% (calculation, below) with the “kicker” that another $4,000,000,000 will be earned upon payoff.
Based upon the above scenarios, does it not make sense that my idea of freezing the valuations and leaving these assets with the respective institutions would be a substantially superior plan for the taxpayers?
Food for thought………………….
Digest well…….
Calculation of Current Annual Yield:
$725,000,000 Interest Income on the $10,000,000,000 @ 7.25%
385,714,286 Interest Expense on the $8,571,428,571 @ 4.50%
$339,285,714 Net Interest Income
$169,642,857 The financial institution’s 50% share of net income
23.75% (Financial Institution’s Income divided by its $714,285,714 investment)
MZ
Sherman Oaks, Ca.
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/23/AR2009032300572_pf.html
I have excerpted a few salient paragraphs from an article written March 23, 2009, by Neil Irwin (Washington Post staff writer) and have made comments thereto:
The “Public Private Investment Plan,” a long-awaited but risky piece of the government’s financial stabilization strategy, will pour government money into private investment funds as a way to move loans from the balance sheets of banks to those of long-term investors.
Yes…., this is extremely risky to the taxpayers.
Under the plan, the government and private investors will invest together to buy up between $500 billion and $1 trillion worth of real estate-related loans and securities from banks, using up to $100 billion in capital, about half of it from bailout funds.
Effectively, the taxpayers will be at risk $13 for each $1 of private capital, thus whereas profits, if any (!), will be split 50-50, the risk is taxpayers, 92.857%, whereas the private partner, 7.143%. Very interesting………………
The hope is that instead of hoarding cash in case those assets continue to lose value, the banks instead will be able to resume lending money once the toxic assets are off their books.
It is difficult to hold back on this one, but I will try.
First…, cash is not the problem. The problem is EQUITY CAPITAL. Cash is not affected by further write-downs, whereas EC is affected, dollar for dollar. These problem ( toxic) assets are held on the books of the respective financial entities at a particular valuation. . If an asset is sold for less than its carrying valuation, the income statement will reflect the loss and that loss will reduce EC. If an asset is sold at the book valuation, there will be no effect upon EC, thus the only effect is that the sold asset will no longer be an ambiguous factor of EC. I believe that a better alternative to this single benefit would be to have the institution keep the asset and freeze the valuation as of a particular date, e.g., April 30, 2009. Those who continue to exclaim that these assets cannot be valued are foolish, at best. The rationale for freezing the valuation is that there have been substantial reductions, to date. Further, it would be logical for the government to guaranty any further decline in value, if the institution held to maturity or termination.
The stock market opened sharply up this morning, an early sign that Wall Street was optimistic about the plan.
Valid observation. Is the move due to hope or what?
Treasury officials are betting that the current low market prices for troubled bank assets are driven more by excessive fear than the reality of how the economy will perform, and that the new purchases will help kick-start those markets and return them to more normal functioning.
I stipulate to this comment. This offers more rationale as to why the banks should maintain these assets at the frozen valuations.
“This is a market that’s basically disappeared,” said White House economic adviser Christine Romer, who appeared on CNN and all three network morning news programs in advance of an off-camera briefing on the program by Treasury Secretary Timothy F. Geithner.
These people are, for lack of another word, scary! Well…., Geithner is the scary one and Romer is his puppet.
In an opinion piece in this morning’s Wall Street Journal, Geithner wrote that the new program will, over time, provide a market for these assets “that does not now exist” and will therefore “improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets.” Geithner wrote that the new government program should make it possible for banks to raise private capital, enabling them to return U.S. government investments that have come to them through the Troubled Assets Relief Program.
First, there is no reason to force a market for these assets, since time, as it usually does, will resolve the matter. If the “frozen” concept were accepted, there would no longer be any balance sheet ambiguities, and due to the significant recognition of impairment, the odds are monumental that, over time, the carrying values would be exceeded. His comment about private capital is naïve or disingenuous. The TARP purchase of 5% preferred stock virtually preempted private capital, i.e., no one, in his or her right mind, would invest at or near a 5% preferred.
The program provides capital for new investment funds, matched with investments from private investors such as hedge funds. The Federal Deposit Insurance Corp. will guarantee debt issued by those private funds, meaning that lenders would likely view them to be as nearly as safe as lending to the U.S. government.
Very interesting, very provocative, and very, very problematic.
The funds will compete against each other at auction to acquire the troubled loans, a process which the government hopes will drive up the price enough to create a price floor for the questionable loans that have been dragging down the financial sector. Whoever wins the bidding will be able to use government money for half their equity share.
Again…., very interesting, very provocative, and very, very, very problematic!
The funds can magnify their returns–and scale of borrowing–by borrowing money from the FDIC and Federal Reserve.
Absolutely and at the risk of further redundancy, EXTREMELY problematic!!
“It is going to be an open bid. That’s part of why we’re going in with the private sector,” Romer said. “They’re going to have money on the line just like we are and the whole idea is to make sure we don’t overpay for them.”
This would appear very funny, if this matter were not incredibly serious.
It works like this, according to a Treasury Department fact sheet. Imagine that a bank wants to sell mortgage loans with a $100 million face value. The FDIC would auction the loans to private bidders. Suppose the winning bidder offered $84 million. The private investor would put up $6 million, Treasury would put up $6 million, and the FDIC would guarantee $72 million worth of loans.
I hope that those who have read this far are sensing, intuitively, a very strange sensation. Note that the taxpayers are putting up $78 million, while private investors a mere $6 million. This “formula” can stimulate some interesting phenomena that would be very, very damaging to taxpayers and very, very beneficial to the financial institutions.
NOTE: Whenever a plan is devised, one of the most important concepts that must be applied is based upon the question as to what could go wrong.
What if: A financial institution sets up a partnership with the government per the parameters outlined, invests $714,285,714.29, with the government partner investing the same amount, and obtaining a FDIC guaranteed, non-recourse loan in the amount of $8,571.428,571.42, for a total fund of $10,000,000,000.00.
The institution has $10 billion face value of “toxic” mortgages, which have been written down to an impaired value of $6,000,000,000, which have a composite yield of 7.25%.
The partnership bids the face value for this group of toxic assets, believing that the 7.25% yield will create a much greater return since the partnership will borrow @ 4.50%, therefore, providing the “appearance” of a business purpose.
The worst-case result: The financial institution will have a gain of $4,000,000,000 on the toxic assets sold (book value @ $6,000,000,000), while its share of the partnership loss is limited to $714,285,714.29. Not too bad for a worst-case scenario! Of course, we, the People, lose $9,285,714,285.71.
The best-case result: The financial institution will have a gain of $4,000,000,000, and the partnership will be earning a current annual yield of 23.75% (calculation, below) with the “kicker” that another $4,000,000,000 will be earned upon payoff.
Based upon the above scenarios, does it not make sense that my idea of freezing the valuations and leaving these assets with the respective institutions would be a substantially superior plan for the taxpayers?
Food for thought………………….
Digest well…….
Calculation of Current Annual Yield:
$725,000,000 Interest Income on the $10,000,000,000 @ 7.25%
385,714,286 Interest Expense on the $8,571,428,571 @ 4.50%
$339,285,714 Net Interest Income
$169,642,857 The financial institution’s 50% share of net income
23.75% (Financial Institution’s Income divided by its $714,285,714 investment)
MZ
Sherman Oaks, Ca.
I’m not a lawyer but…
How is this any different than me suing one of my agents because they leveraged their volume to get me to write a bunch of crappy risks that incurred heavy losses?
Look at this quote “to induce it to insure”
AIG still had the power of the purse, did they not? Was Countrywide holding a gun to their head? Did AIG not have the responsibility of due diligence?
How is this different than the agent/carrier example? An agent could easily use high premium volume “TO INDUCE [a carrier] TO INSURE” undesirable risks….. so is AIG suggesting a carrier should be able to turn around and SUE their agent for poor loss ratio?
PLEASE correct me if this is mistaken, but I just don’t get it. Is AIG not the one that makes the insure/don’t insure decision? Are they not the underwriter?
This is as ridiculous as “Hank” suing AIG over his equity losses.
…this is a classic… Countrywide was as brazen in the mortgage business as AIG was in the insurance industry….
…I can just see this one in front of a jury… it’ll make the OJ trial seem like an episode of a fishing show…
So far, we’ve spent $700 billion dollars bailing out Wall Street. And what do we get? Banks throwing lavish parties, CEOs taking vacations on corporate jets, and now AIG’s fat bonuses.
It’s time to try something different
Its about time the Financial unit started standing up and denying payouts on these claims.
There is great certainty that the lenders misrepresented these package deals to the insurer in hopes of collecting when these things blew up.
BOTH OF THESE COMPANIES ARE CROOKS .COUNTRYWIDE HAD MY MORTGAGE THEY SOLD IT SEVERAL TIMES TO OTHER MORTGAGE COMPANIES ONLY TO BUY IT BACK WITH HJIGHER INTEREST RATE.FROM A 4.5 T0 A 10.0.SEVERAL TIMES THIS HAPPEN. NOW BANK OF AMERICA HAS IT.
ALSO AMERICAN GENERAL INSURANCE COMPANY NEED TO BE LOOK AT THEY SWITCH MY FAMILY LIFE INSURANCE POLICY.FORCE TO TAKE A LOAN THEN SWITCHED THE POLICY.WHAT CAN A CITZEN DO.NEED INFO.I HAVE BEEN TRYING TO TALK TO AN ATTORNEY FOR THE LONGEST WITHOUT ANY HELP AT ALL.ALSO UNUM PROVIDENT INSUARANCE CO. I AM RECIEVING BEFITS AFTER THEY CUT ME OFF BECAUSE OF THERE MISTAKE FOR OVER PAYMENT THAT SHOULD HAVE BEEN DO ME BECAUSE OF STOPPAGE OF MY FUNDS THAT CAUSED ME TO ALMOST LOSE EVERYTHING.I AM JUST NOW BEING PAYED AGAIN.STARTING NEXT MONTH OCT. 2009