Toxic assets still looming in the murk

The words "toxic assets" on $100 bills.


Kai Ryssdal: It's worth a mention that the case isn't over just because of the sentencing. Investigators say they're still trying to figure out the extent of the fraud. Any day now the Treasury Department is expected to announce the next phase of its plan to help banks unload those bad assets. More than 100 money managers have applied to run the program. Big names like PIMCO and Blackrock are said to be on the short list. But with things starting to look up for a lot of banks, some are starting to doubt the program will ever get off the ground, and whether we still need it. Our New York bureau chief Amy Scott reports.

AMY SCOTT: Here's how the public-private partnership was supposed to work. Money managers selected by the Treasury would raise cash from private investors. The government would match it, and kick in cheap loans. Then the fund would buy troubled mortgage-backed securities from banks.

Problem is, those banks don't want to sell. I asked Josh Rosner with advisory firm Graham-Fischer why. He points at my wrist.

JOSH ROSNER: You've got a watch. And when you bought the watch your watch was a $5,000 watch.

SCOTT: I wish.

But anyway, let's say my watch is now worth half what I paid.

ROSNER: So if you were forced to sell it, you'd realize a $2,500 loss.

SCOTT: But if I just keep it on my wrist...

ROSNER: If you keep it on your wrist then there's no loss to be had. So that's exactly the situation.

The banks are holding problem securities on their books hoping they'll regain their value. Investors are willing to buy some of those assets, but only at a fraction of what the banks say they're worth.

Sue Allon helps hedge funds and other investors value mortgage-backed securities. She says many were initially interested in the government's program. But they're starting to lose patience.

SUE ALLON: The people who've funded these investment pools are saying, OK, well if you can't find anything to buy, then we need to re-deploy our money and put it elsewhere.

Then there's the question of whether the banks still need the program. Several banks have raised billions of dollars from investors in the last few months. That helps cushion losses from their toxic securities. It's kind of like me and my $5,000 time piece. The more cash I have in the bank, the less likely I am to pawn that watch.

But analyst Paul Miller with Friedman Billings Ramsey says banks still need a lot more capital. Up to a trillion dollars worth.

PAUL MILLER: The bottom line is that we have not addressed the toxic assets on these balance sheets, and until we address them, we're going to still struggle in this environment, and just jump from crisis to crisis.

Today a Treasury Department spokesman said the public-private program is still on track. Miller says we still need some form of this plan, but one that's attractive to both investors and banks.

In New York, I'm Amy Scott for Marketplace.

About the author

Amy Scott is Marketplace’s education correspondent covering the K-12 and higher education beats, as well as general business and economic stories.
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it would seem that the fasb rule to let banks as i understand it find a fair value for thes poor assets makes them go from quarter to quarter as if to be looking for a way to sleaze out of the necessary fair value adjustments on their balence sheet. Every time they make profit they would be just writing off a few billion more as a charge and making it look like the bank is not gaining on the sacred eps they all care so much about.
the fed knows this, sees this as do the banks, but to move ahead the major banks need to take their medicine, show the public how greed can cause damage and move on the the pressing problems of commerical and credit card defaults.
and yes the bonus some so called "exec" should be paid in should be a toxic asset so he can be liable for its original value and make payments on the asset till it" returns to the value they are all waiting for"

>> If banks simultaneously want to clear so-called toxic assets from their books and still value them at face, here’s a modest proposal: Use he assets to pay the salaries and, especially, the bonuses of those bank execs we here about who ran their companies into the ground. For example, the CEO of MegaBank is due a $2 million bonus? No problem – five mortgages each valued by the bank at $400,000 should do just fine.

>> Anyone else notice that last fall the mega-banks claimed they couldn’t raise a dime in the private market to save their hide, much less to lend, but suddenly have managed to come up with almost $100 billion in new capital to pay back TARP loans? Could it be that the TARP restrictions on executive pay had something to do with it? One does wonder whether his newfound capital represents the Richistan buddy system at work, or whether these are new investors who might harbor plans of changing the bank compensation system.

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