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The public-private partnership
Whiteboard Public private partnership
Paddy,
Great explanation!
Without reading too much else about this, I am struck by how much of a burden is being placed on the FDIC. And then I saw the below article and got even more concerned: the FDIC wasn't collecting fees and how, when it needs them, will be hitting up banks for the needed funds with an emergency fee, and now will go beyond its charter (the D in FDIC stands for Deposit, not Dtoxic-asset) to backstop the Geithner plan. And the only solution seems to be to reinflate the housing bubble to make the Dtoxic-assets worth anything. And that doesn't seem easy or make a lot of sense.
Am I crazy or is this what's going on?
Now-needy FDIC collected little in premiums. With fund going strong, banks didn't pay for decade. By Michael Kranish. Boston Globe. March 11, 2009
http://www.boston.com/news/nation/washington/articles/2009/03/11/now_nee...
@ James Fredrickson - Like this? http://www.businessinsider.com/banks-plan-to-bid-on-each-others-toxic-as... I find it hilarious that Paddy would use a Hummer H1 as metaphor. The H1 will never be worth more than his $5,000 example. And that is why the private, of this public-private "partnership", will not touch this. The reality is, that the same people who are expected to clean this up, are the ones who knew exactly what they were doing, making fat bonuses for doing nothing but build a house of cards (when they were actually doing something) and are now not going to put their easily earned, ill-gotten gains into a plan they know will not work because they really do know what the assets are worth. Look at how much excess housing capacity is available, add what is being held back, and adjust for all the people who were put into houses they really couldn't afford and will be losing them; and you get some numbers that will scare your britches off! I am getting a drink!
What's to stop Sam from forming his own hedge-fund on the side and using public/private partnership money to effectively buy the toxic asset from himself, thus taking it off of his books at higher price and shifting his risk onto the tax payer?
Hi Haroon.
Thanks for your comment. Sorry you don't like the Hummer analogy, although I have to say that I don't agree that cars lose 50% of their value after the initial sale (seen Blue Book rates for second-hand Lexus hybrids recently?). All best are off if you're talking GM cars, of course!
But I think you're right about the roulette we're playing here. The longer it takes to recover, the more likely it is that much of this debt will end up worthless, and we will end up losing our equity stake. We could step in and buy all the debt at par and keep our fingers crossed. But think of the downside there!
Your presentations are very informative and thought provoking.
I have a small criticism. I wish you would have used a better analogy. We all know cars reduce in value by half the second they are driven from the lot. And unless it's a collector's car or a rare exotic, it will NEVER be the case that a car goes up in value, no matter what you do with it.
comments:
It seems to me that this plan is attempting to spread the risk. However I think taxpayers are getting an absolute raw deal. From what I understand, the FDIC is willing to issue a maximum of up to a 6 to 1 debt-to-equity ratio to purchase these asset pools! And the UST will also provide equity at the same time. Although many details have not been released about the terms of the debt (date of maturity, interest rate, etc.) I feel like the government is playing russian roulette here. If it makes one slight miscalculation or error in making these loans the results could be disastrous. This is not even mentioning the assets themselves; nobody can predict what values these assets will fetch in 1, 2, 3 years from now. Is this seriously the best that we can come up with?
What are your thoughts/comments on the issue?
HI Anonymous (or is it Noel)
You ask a great question - what are the toxic assets? They can be anything. Mortgages, securities backed by mortgages, bonds, loans, whatever - anything that is trading, or marked at distressed (less than 80 cents on the dollar?) prices.
But the price does not necessarily reflect toxicity.
I address this issue to an extent in another whiteboard on this page, but it's worth noting that not all assets labeled toxic now will necessarily turn out to be toxic in the future.
For example, if I'm a troubled bank and I need to sell all my assets to raise money, it doesn't really matter whether those assets are CDOs of mortgage backed securities (often genuinely toxic, ie, not paying interest and probably unlikely to, ever) or senior secured loans (not necessarily toxic in the long run, as most are still paying interest and even if the companies go under, they're well-enough collateralized that I'll get my money back).
Why does it not matter? Because I need to sell them now to make money, which means I have to take the market price for my assets, however low that price may be. In the case of genuinely toxic assets (those CDOs) they're probably only worth 5c on the dollar, but in the case of loans that are likely to pay out at 100c on the dollar in a few years, I'm at the mercy of the market. I'll get what the market's prepared to pay and no more. In other words, one bank's toxic asset can be another bank's goldmine. Which is what Treasury is banking on.
